Forvis Mazars retail forum reviews low SA consumer confidence and the rise of Buy Now Pay Later

According to a consumer survey, approximately 50% of consumers in South Africa admit to experiencing severe financial distress, while 26% reported being in some form of distress. With approximately 40% of the nation relying on government grants, the dependence on alternative financing options becomes apparent.

Evidence of escalating prices and decreased purchasing power is evident from consumers spending more in order to buy fewer products. This trend is accentuated in the grocery market, where consumers pay higher prices for smaller quantities of staple items such as flour and oil.

The Q3 2020 South Africa Industry Insights Report shows that 12% of credit cards and 22% of personal loans extended by banks were now overdue three or more payments, while a third of clothing account holders were behind on three or more payments.

A global trend still on an upward trajectory locally is the steady growth of private label sales. It reflects consumers seeking value for their money, and private-label products provide an attractive alternative.

All these factors underscore the increasingly important Buy Now, Pay Later (BNPL) retail model, which is deeply embedded in online sales. Forecasts indicate a further increase in online retail activities in the region, a shift in consumer behaviour that is reshaping the retail landscape and requires retailers to adapt their strategies to remain competitive.

Inflation rates in South Africa, particularly food inflation, are alarming. Within an overall inflation rate of 7.1%, food inflation stands at 14%. These high inflation rates have a severe impact on the population, especially among vulnerable groups.

Load shedding raises concerns about food shortages as it affects food storage, processing, and refrigeration. Consumers have observed empty shelves in grocery stores, signaling potential future food scarcity. Rising inflation exacerbates these concerns, raising fears of possible unrest and looting, something to which South Africa is no stranger. This in turn forces businesses and retailers to relocate, diverting resources from economic and job expansion efforts. Further restrictions on economic growth stem from major retailers like ShopRite and Pick n Pay having incurred substantial costs related to purchasing diesel as an alternative power source.

This all feeds into rising prices of essentials. Over 70% of households worldwide, including South Africa, are grappling with severe food insecurity, indicating the widespread impact of these challenges. South Africa has the most unequal economy globally, and high food inflation disproportionately affects the population.

In this combustible scenario, consumers are turning to the BNPL model to navigate financial difficulties. Consumer surveys reveal that more than half of the population in South Africa experiences various levels of financial distress with 42% borrowing specifically to pay for food. While it is expected that consumers may borrow for discretionary purchases such as clothing or electronics, such a reliance on credit for essential items raises concerns.

South African consumer credit applications have surged, yet approvals have not kept pace. This indicates that many consumers are either unable to access credit or are choosing not to utilise it due to various reasons, pointing to a need for alternative financial solutions, such as BNPL, to bridge the gap between credit availability and consumer spending.

The BNPL, which originated in Australia to cater to its weekly or bi-weekly wage payment model, has in South Africa adapted to a monthly system and consequently become an attractive option for consumers by offering lower costs compared to traditional lending methods. Instead of burdening themselves with high interest rates and application fees, consumers can access credit at a more affordable rate, allowing for increased spending in the retail sector. The average consumer using this model is typically a female in her 30s, earning around R15 000 a month. This demographic often utilises debit cards rather than credit cards, reflecting a shift away from traditional credit in favour of alternative payment options.

Sustainability of the BNPL trend

The sustainability of the BNPL trend can be viewed from multiple perspectives. On one hand, it offers consumers a more affordable form of credit, reducing the burden of high interest rates and application fees associated with traditional credit options. This affordability can potentially stimulate more spending in the retail market. Moreover, BNPL providers operate on a commission and fee-based model with retailers, rather than relying on late fees or penalty charges. This incentivises increased transaction volume and consumer engagement.

Sustainability encompasses three pillars: environmental, financial, and social/community impacts. BNPL models strive for sustainable lending practices. Responsible usage of BNPL as a budgeting tool rather than a credit line is encouraged.

The model's sustainability is evident in its ability to offer affordable credit options, boost basket sizes for retailers, and encourage responsible borrowing and spending habits. While the debate around the exact impact and future projections of BNPL persists, it is clear that this alternative financing model is meeting a crucial need in the market and supporting both consumers.

Authors:

Danielle Keeve, Audit partner and national sector leader for Retail

05 June 2023