SA consumer market trends: Positioning for growth amid market volatility

The year 2024 commenced with persistent inflation, elevated interest rates and sluggish GDP growth. However, by the end of the year, South African consumers experienced a renewed sense of optimism, buoyed by a series of interest rate cuts and a decline in inflation.

Despite this positive shift, ongoing economic turbulence and a lack of substantial progress in tackling poor economic growth continue to dampen sentiment as we continue through 2025.

The debt hangover

Many consumers are also still grappling with the debt hangover from the sustained high inflation and interest rate environment experienced over the last few years, which has reduced disposable income. Interest rates as a percentage of disposable income remain elevated continuing to put pressure on household finances. As a result, consumers have less disposable income and have turned to options such as two-pot retirement withdrawals and increased use of credit to supplement their day-to-day expenses.

Some optimism was felt following three consecutive decrease in fuel prices allowing some reprieve to consumers as seen in CPI coming in at 2.7% y-o-y, below market expectations. In conjunction. With this, a decreasing maize price and additional interest rate cuts was expected to add some breathing room for South African consumers. However, recent global political events and volatility is expected to only add further burden to an already burdened consumer.

Navigating price sensitivity in the grocery basket

This lingering impact on spending power is felt most acutely in the consumer sector, as fast-moving consumer goods (FMCG) like groceries make up the largest proportion of expendable household income. The price inelasticity that exists when buying essential food items has driven a strong buying-down trend in the retail sector, with consumers opting for private labels over big-name brands to maximise the value in their baskets given their financial constraints and price sensitivity.

Despite the challenges, local consumers are savvy and continue to prove their resilience in these tough economic conditions by using their keen eye to find good value, and private-label house brands meet this need.

Given the economic outlook, with higher-for-longer interest rates, consumers will continue to choose brands they trust and will remain hesitant to spend on new products they do not already know and use, unable to risk the cash on a product that might not deliver the perceived value.

Consumer businesses need to align with these evolving behaviours and trends by innovating in areas such as pricing, product mix and package sizing, offering a range of options to meet different needs within the income cycle. Companies also need to find ways to contain costs, with input costs an important avenue to mitigate price increases while continuing to offer value and affordability.

Leveraging technology is one effective way for consumer companies to streamline operations and minimise costs. In this regard, artificial intelligence (AI) is playing an increasingly integral role, as it gives retail companies the ability to take greater control of supply chains to protect margins and improve efficiencies

Strategic collaborations and M&A

While the volatility currently characterising markets may require a pause in large capex spending projects, the urgency to adapt to these trends and create future-ready operations is growing. In this regard, retail and consumer companies need to start considering their future growth strategies today.

With the FMCG sector dominated by a few big players, opportunities exist to buy or partner with smaller niche players that operate in the formal and informal retail sectors to unlock new ways to weather the tough economic conditions and position for growth when the market turns.

Furthermore, the consumer sector remains ripe for consolidation among the smaller listed players, offering improved liquidity and allowing scope for multiple rerating as improved free float and balanced shareholder bases result in improved trading of shares.

Smaller companies can also benefit from partnering with FMCG giants, especially in tough times, to leverage their economies of scale, operating leverage and supply chains.

Positioning for the upswing

FAs such, companies should use this economic cycle to consider acquiring quality businesses as opportunities exist to pick up these companies at good value, which can unlock growth into new markets, access new manufacturing capabilities, or acquire specialised skills.

While FMCG companies may be rethinking deploying capital right now due to the market uncertainty from trade wars, higher-for-longer interest rates, and constrained consumer spending, now is the time to explore M&A opportunities that will unlock growth when the market turns.