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South African Journal of Economic and Management Sciences

versão On-line ISSN 2222-3436
versão impressa ISSN 1015-8812

S. Afr. j. econ. manag. sci. vol.21 no.1 Pretoria  2018

http://dx.doi.org/10.4102/sajems.v21i1.1962 

ORIGINAL RESEARCH

 

High inventory levels: The raison d'être of township retailers

 

 

J. Orpha Cilliers

Department of Entrepreneurship, Supply Chain, Tourism, Transport and Logistics Management, College of Economic and Management Sciences, University of South Africa, South Africa

Correspondence

 

 


ABSTRACT

BACKGROUND: This study investigates the cardinal role of optimal inventory decision-making in the performance of small formal retailers in Soweto, constituting a projected, lucrative retail environment.
AIM: The research question was how Soweto small retailers make inventory decisions to promote their income growth and age of the business. For this study, a descriptive research design was followed.
SETTING: The universe of the study comprised all the formal small, medium and microenterprises located in Soweto township.
METHODS: Using probability sampling, the sample size was set at 650 businesses. Of the 650 completed questionnaires, the responses of 297 respondents operating in the retail grocery and retail general stores sectors were analysed quantitatively using exploratory factor analyses, cluster analysis and cross-tabulation.
RESULTS: This study showed that being more inclined to proactively maintain a high level of inventory could result in positive business performance in terms of both growth in income and age. Younger businesses (less than 5 years) could grow if they decide to stock up on sale items, purchase more items for sale, provide for customers' fluctuating demands and buy more stock to save on transport costs. Purchasing less or the exact amount of stock as what can be sold within a month could be detrimental to the performance of general and grocery retailers in Soweto.
CONCLUSIONS: The results also show that if retailers want to grow and exist for 5 years and more, they should consider both proactively maintaining a high level of inventory and doing so with ease. In this study, the older (5 years and older) business groups were mostly owned by older people, who showed a tendency to establish themselves in stand-alone shops or smaller shopping centres. Older businesses also tend to buy stock daily or weekly, or when stock is low. These older businesses without income growth were mostly family businesses who displayed contentment with the status quo of business performance and seemed to lack entrepreneurial skills.


 

 

Introduction

The retail sector is critical in a community's economic and social welfare, by providing consumers with choices and services (Ligthelm 2008:37). In South Africa, population growth forms the key driver behind retail growth (Prinsloo 2014:6). Retail intermediaries have the vital role of being the final businesses in a supply chain and linking manufacturers to consumers, while performing various value-adding activities which are mostly driven by customers' need for convenience (Prinsloo 2014:1). Value-adding influences the market offering and thus the inventory decisions made by retailers. For example, retailers provide consumers an assortment (in terms of brands, designs, colours, prices) of products and services to choose from, at one location. They also perform bulk-breaking by satisfying consumers' need for goods in smaller quantities. Another value-adding activity relates to on-shelf availability, which allows consumers to purchase products when the need arises, thus allowing households to keep small inventories at home. Finally, retailers add value by providing services to customers that make the buying decision easier and more informed, such as credit, product information and display of merchandise (Ligthelm 2008:38; Prinsloo 2014:1).

According to Hatten (2016:177), small retailers compete on operational excellence (best or lowest price), product leadership (best product, high quality) and customer intimacy (long-term relationship through superior service). Allen (2012:330) confirms that successful retailers realise that the ultimate goal of supply chain management is to be customer driven, that is, to provide the exact level of service that the customer expects at a minimal cost and understand what is important to customers, what level of service they expect and what performance level they are willing to pay a premium for. Effective supply chain management can potentially lower the costs of inventory, transport, warehousing and packaging, while increasing customer satisfaction (Longenecker et al. 2014:414).

Unfortunately, worldwide, most new entrants to retailing have no experience of retail selling and learn through experience and replicating what others do (Honig, Karlsson & Hägg 2014:97; Yang 2016:2; Yordanov 2015:50). Lebusa (2013:76), Choto, Tengeh and Iwu (2014:93-94), as well as Malebana and Swanepoel (2015:109) note that South Africa is faced with a need for more skilled entrepreneurs to run these businesses efficiently. New entrants thus need the mentorship of older, established business people (Matabooe, Venter & Rootman 2016:2). Kesavan and Kushwaha (2014:2118) found that retailers in general benchmark their inventory performance against other organisations in the same industry or against their competitors to guide decisions; thus the need to learn from and emulate counterparts is confirmed. With regard to opportunities to learn from competitors, Badenhorst-Weiss and Cilliers (2014:13) found that older, growing Sowetan small businesses tended more than younger, stagnating businesses to perform regular competitor analysis. This study attempts to identify what the owners of younger Sowetan businesses can learn from their older, more established counterparts with specific reference to inventory decision-making. The research question thus emerging is how small retailers in Soweto make inventory decisions to promote income growth and become older (mature or established). The subsequent secondary objectives are (1) to identify possible profiles among Soweto grocery and general small retailers with regard to inventory decision-making, (2) to determine the relationships between cluster membership and demographic (education and owner age) and business variables (location, frequency of inventory purchases, future perspective, and reasons for starting) and (3) to provide retailers in Soweto showing negative (or no) growth with guidelines on inventory decision-making based on the inventory decision patterns displayed by older counterparts with income growth.

Background

In this section a short overview of the history, opportunities and challenges of the township retail environment is provided to illustrate the circumstances behind inventory decision-making by township retailers in their quest for survival. In the pre-1994 South African retail landscape, choices in townships were limited and dominating small, often informal, convenience businesses offered basic household necessities to relatively low-income earners. Lebusa (2013:76) explains that most small retail outlets (including formal traders) were historically established out of desperation, rather than by identifying and exploiting a gap in the market; thus, such business owners lacked the business skills required when the country moved to a new promising dispensation. Lebusa (2013:77) describes a survivalist mentality that originated (and still drives business decision-making) during those years, where a lack of focus on return on investment stemmed from a lack of business skills training - by not being truly entrepreneurial, those businesses' prospects for growth were diminished.

At that stage only a small portion of consumer spending was done in townships. This worldwide phenomenon, where residents prefer to shop elsewhere is called 'outshopping' (see Papadopoulos 1980:41). Prior to the development of local retail centres, township dwellers travelled long distances and spent a substantial part of their disposable income on transport costs, causing a leak of income from townships (Gauteng Quarterly Bulletin 2012:26). The lack of efficient retail infrastructure in townships thus had a far more negative impact on poorer households than more affluent ones (Ligthelm 2008:37). The progression of many South African consumers into middle-income groups postapartheid changed the dynamics of township shopping patterns, leading to substantial growth in retail infrastructure and facilities in townships, and expanding retail choices offered by formal businesses (Ligthelm 2008:39, 51). Lebusa (2013:76) and Beneke (2014:22) report that post 1994, the majority of inhabitants refused to leave the townships, which resulted in substantial market potential in these areas for consumer goods and services. Consequently, entry into this previously untapped emerging market of 'inshoppers' not only proved lucrative to national retailers, especially supermarkets (Ligthelm 2008:37, 41), but also positively impacted consumers by cutting down on travel costs and time (Gauteng Quarterly Bulletin 2012:26). With the entrance of bigger retail stores, many owners of small retail businesses lost market share, struggling to adapt, compete and survive due to lack of business skills (Lebusa 2013:76; Ligthelm 2008:52). Township customers who used to support small grocery retail shops due to convenience and smaller quantities being offered started to support the supermarkets and malls, which offered more variety and lower prices based on increased affluence and higher mobility (Strydom 2015:467). At that stage survival for township small businesses seemed to lie in changing the small business model towards effective customer service, with a small dedicated assortment of merchandise, satisfaction of emergency needs, selling in small units and extension of credit facilities (Ligthelm 2008:52).

When assessing retail growth trends and township consumer preferences (for the period relevant to this study), growth reports on the South African retail performance for the period 2013/2104 showed that retailers experienced lower growth than in 2012 (Stanlib 2013), which was attributed to slowing consumer income, lack of job growth and eroding consumer spending power. StatsSA (2015) confirmed that retail growth declined to 4.5% in 2012, 2.5% in 2013 and 2.4% in 2014. Beneke (2014:21) and Prinsloo (2014:6) state that since the typical township resident can be categorised in the lower end of the Living Standards Measure (LSM 1-5), this vast population forms a viable market for fast-moving retail consumer goods and township shopping centres. Prinsloo (2014:2) notes that despite the increased number of convenience stores in townships over the past decade, major gaps exist for small centres (up to 3000 m) within walking distance from large residential communities, since larger community-type centres tend to focus on taxi ranks and pedestrian areas. Prinsloo (2014:7) further foresees shopping centre development accelerating, especially in bigger, trendsetting townships. However, the resultant strong commitment of grocery retailers to be better represented will require small, independent formal retailers to become more competitive. According to Gauteng's Provincial Treasury (Gauteng Quarterly Bulletin 2012:34-35), growth and survival in retailing depends, among others, on balancing the challenges and opportunities posed by lower sales retail figures due to rising food prices, major retail skills shortage, consumers' increased demand for convenience, and potential growth in the food industry. Beneke (2014:21) describes the typical township retailer as being small, underequipped with a point-of-sale system and refrigeration facilities, carrying low levels of stock and, most importantly, often being geographically dispersed. Such geographic dispersion makes it increasingly challenging and expensive for suppliers to deliver, which in turn leads to higher prices, lower customer satisfaction, limited variety and low stock levels (Beneke 2014:21). Not being able to deliver on convenience will inevitably cause township retailers to lose their grip on competitiveness (see also Narayan & Chandra 2015:22 who researched Indian food and grocery retailers). Beneke (2014:22) reports that 75% of township residents continue to buy from spaza shops on a daily basis, due to their convenience and proximity, despite having access to general dealers, situated in both business and residential areas, which carry a wider range of products and encourage self-service.

In summary, the development of retail centres, population growth, the viability of the consumer goods market, the need for convenience, the entrance of supermarket chains, the increased costs of distributing products to widespread retailers and the resultant low levels of stock have seen spaza shops evolved into being the main retailers in townships due to their convenience and location. This has put increased pressure for survival on formal independent grocery and general dealers, and coupled with their reported lack of skills their continued survival is in doubt. From the above, the reason for focusing on formal small, medium and microenterprises (SMMEs) is evident, which is confirmed by the findings from previous studies in Soweto by Ligthelm (2008, 2009) stating that since survivalist businesses lack true entrepreneurialism and do not contribute to wealth creation, research should rather focus on formal, independent businesses. Furthermore, the focus on formal SMMEs in this study also supports the aim of the 2013 SME Growth Index, namely to understand the driving forces behind the formal sector as a more transformative contributor to wealth creation, economic growth and innovation than informal survivalist businesses (SBP 2013:1). The aim here is to determine what inventory-related decisions could contribute to the survival of formal township grocery and general small retailers.

Literature review: Inventory-related decisions made by small retailers

According to literature, small retailers base their decisions about the level and type of inventory items to keep not only on balancing costs and service delivery, but also on consumers' preference (in terms of convenience shopping, the different elements of the product offering, and on-demand availability of items). The discussion below confirms the interrelationship between these variables.

Convenience

Having inventory items available conveniently is influenced by complex location decisions. A key location factor for retail businesses is the point of maximal demand for products and services, which is described by Sevtsuk (2014:375) as a location in close proximity to both customers in need of the offering and other retailers selling complementary items. Since retailers are the last point of contact with final consumers in the supply chain, they should be located conveniently near the place where customers want to purchase items (Scarborough 2012:539). Prinsloo (2014:2) stresses that convenience shopping is the result of more frequent shopping of quality and variety products in smaller grocery baskets at local retailers. Retailers who mainly offer so-called convenience goods require a location close to their target customers to prevent customers easily substituting competitive brands when the need arises (Petty et al. 2012:264). Few customers are willing to repeatedly travel long distances just to shop. The role of the transport network is crucial: if customers are inconvenienced, the store's trading catchment area is reduced; therefore, any retailer's prime consideration is sufficient customer traffic (Allen 2012:309; Scarborough 2012:546). Sevtsuk (2014:374) proposes the availability of retail and service establishments within walking range from homes and workplaces key to achieving sustainability - environmentally, socially and economically - within these neighbourhoods

The small business retailer should have a thorough understanding of the scope of its trade catchment area from which customers can be drawn over a reasonable timespan. The primary variables influencing the scope of the trading catchment area are the type and size of the business and the type of closely located competitors. A convenience store with a general line of merchandise, which can be found almost anywhere, has a small trading catchment area because it is unlikely that customers will drive across town to purchase items that are available closer to their home or business. On the other hand, if a retailer offers specialised products and a wide selection, and also has knowledgeable salespeople, it may draw customers from a great distance. As a rule, the larger the store, the greater its selection and the better its service, the broader its trading catchment area. Businesses that offer a narrow selection of products and services tend to have smaller trading catchment areas (Scarborough 2012:549).

According to the Soweto Retail Strategy (City of Johannesburg 2005:36), the ideal for a township (like Soweto) lies in locating retailers conveniently close to the households they serve, to improve the overall functioning of the city: there is less need to commute, better use of land and a more equitable balance in the distribution of value-add across the metropole. In township areas characterised by low vehicle ownership and underdeveloped transport systems, poorer inhabitants either walk or use taxis to go shopping. In the absence of retail outlets, township dwellers shop at nearby urban retail outlets rather than in township shops, or workers tend to shop close to their places of work, which are primarily located outside townships. This unique situation fosters an environment where local residents buy from local stores, which are typically owned by familiar fellow residents. The locations of such outlets are based upon the business founders' proximity to their homes (Stokes & Wilson 2017:349). Schaper et al. (2014:44) state that small business owners and their businesses are often attached to a specific place for historical, practical and symbolic reasons which makes the local (and regional) socio-economic environment a major determinant and outcome of the entrepreneurial activity. Small business owners get to know their customers and neighbourhood on a personal level and build personal networks (Tornikoski, Gerbasi & Molecke 2015:243-244), which allows them to provide individualised service and to obtain first-hand knowledge of customers' wants and needs. The competitive advantage of speciality products, personalised service and quality, could enable them to compete with bigger businesses' lower prices (Hatten 2016:14). Also, the rapport retailers build with their customers is vital, causing customers to be willing to pay more for a product when they know the business owner is a good steward in the community. Scarborough (2012:545) points out the synergistic advantage when a small business's image fits in with the surrounding community or character of a town, and the needs and wants of its residents. In this regard, Kwon, Heflin and Ruef (2013:980, 1000) confirm that t