The South African restaurant industry is under increasing strain due to rising costs, alternative power costs and reduced consumer spending. In this environment, consumers gravitate towards strong and trusted brands.
Restaurant brands can maintain their competitiveness by keeping up with the latest trends in the ever-evolving food services industry. Brands can gain consumers by adopting sustainable practices, providing exceptional pricing, or designing distinctive dining experiences.
Worsening economic conditions
Our business depends on consumer spending at restaurants. The prevailing uncertainty of the South African economic environment persists to strain the consumers’ disposable income and impacts our profitability and decisions on capital investments.
South Africa contends with numerous economic challenges, including persistent low growth, high inflation, increased load shedding and a widening unemployment and inequality gap. These conditions led to social fragility and a higher incidence of social unrest. In August 2023, the Western Cape was subjected to an eight-day taxi strike, resulting in restaurant closures and cancelled restaurant deliveries due to transport unavailability.
The year ended December 2023 was the worst year on record for South Africa’s fragile power situation. Year-end data by independent energy analyst Pieter Jordaan showed that the average citizen spent 19.9% of the year with zero power. South Africans spent 72.6 days or 1 742 hours with no power up to December 2023 (blackout hours), more than double the amount experienced in 2022 and almost ten times as much as in 2021. In addition, a significant portion of the year was at stages 5 and 6.
Load shedding constraints negatively impacts consumer and business confidence. It results in lost sales and higher operating costs for restaurants.
There are also indirect impacts, including delayed deliveries to restaurants and higher costs for ingredients from suppliers which put pressure on franchise partner profitability.
While the supply chain issues related to the Russia/Ukraine war have eased, local food inflation remains elevated due to load shedding and increased diesel usage by all food producers. High price increases were recorded for the key products. In addition, imported products such as hake and coffee were more expensive due to the weak Rand. High price increases were recorded for the key products of chicken, eggs, pork and vegetables. Due to unusual weather patterns and load shedding, South Africa experienced poor harvests of potatoes from April to October 2023. This significantly increased input costs in our production of frozen potato chips. While raising menu prices to recover costs is essential, higher prices risk alienating consumers.
Key economic indicators
Unemployment
The unemployment rate rose to 32.1% in the fourth quarter of 2023, up from a one-year low of 31.9% in the prior period, as the number of unemployed persons increased by 46 000 to 7.9 million. The youth unemployment rate in South Africa, measuring jobseekers between 15 and 24 years old increased to 59.4%.
Economic growth
The local economy grew by a marginal 0.1% in the fourth quarter of 2023, bringing the annual growth rate for 2023 to 0.6%. The real GDP was R1 158 billion. This is above the pre-COVID-19 reading of R1 150 billion but still below the peak of R1 161 billion recorded in the third quarter of 2022.
Inflation
The average inflation rate for 2023 was 6.0%, lower than 6.9% in 2022, and is expected to average 5% in 2024. Inflation for food and beverages was mainly driven by inflation on bread and cereals, vegetables and dairy products, followed by meat, sugar and sugar‑rich foods.
Against a difficult backdrop, local consumers seek affordable and reliable products. The restaurant industry is highly competitive, and the landscape favours established networks over independent operators. With tighter budgets, consumers are more careful about spending their money and are developing diverse ways to stretch it. They are more interested in value deals, discounts, smaller meals with lower price points, competitions, menu innovation and loyalty programmes.
Due to economic conditions, the pool of potential franchise partners has been reduced. The high incidence of load shedding makes the restaurant industry less attractive to franchise partners.
How we respond
We deliver an unmatched offering that meets the consumers’ need for quality, service and price requirements. Our offerings are accessible across every format and channel. As the tough economic environment persists to affect consumer spending, we diversify our offerings across the value/price spectrum. We enhanced our loyalty programmes to attract and retain consumers. Our Retail brands are ideally placed to give customers a taste of their favourite brands at home.
Our procurement team strives to achieve the best pricing on bulk food items, and we hold higher inventory to lock in better pricing. They continuously explore alternative suppliers and options to provide same or better quality to our franchise partners.
Alternative power solutions have become more important in the South African restaurant industry. By year-end, 95% of Leading Brands restaurants had access to alternative power solutions. We invested in solar installations and larger, more efficient generators in our Supply Chain to increase our energy independence.
We continuously innovate our franchise value proposition to ensure that it will be appealing to prospective franchise partners.
Read more about how we manage the franchise partner relationship.
Changes in consumer behaviour
There are more cars on the road as companies revise their work-from-home policies and ask employees to return to the office. There are also more sporting and social events to entice consumers out of their homes. This increased movement is positive for the restaurant trade, which continues to normalise into defined day parts (breakfast, lunch, and dinner) post-pandemic.
Growth in the delivery channel has slowed. However, the collect ordering and drive thru channels continue to perform strongly. Evening sit-down trade is recovering, but bookings tend to be earlier, given crime and load shedding considerations. In general, transaction sizes are smaller as consumers look to save money.
Many consumers have cut back on take aways and eating out to save money and spend more time preparing food at home. Exploring new recipes is a pastime that many consumers have adopted.
While saving money is a top priority for consumers, they still want to treat themselves whenever possible, particularly after a prolonged pandemic that limited social gatherings. Here, restaurants and especially casual dining options are seen as an affordable luxury. In some cases, they will trade down to less expensive restaurants.
Social media is increasingly used to complain about or criticize brands that do not meet expectations. Additionally, consumers are looking for a dining experience. Interesting décor and backgrounds make for shareable content.
Megatrends
More plant-based options
Restaurants are including plant-based options on their menus and offering better-tasting meat replacements. Many dedicated consumers are willing to pay more for the vegan options they want.
Chicken is a firm favourite*
Chicken is the largest fast-food category in South Africa and other African markets. South Africans consume about 28 million chickens weekly.
Healthy eating (most of the time)
More consumers prefer to eat fresher, healthier food because they care about their health. This includes reducing the intake of processed foods, sugar, fat, salt, and, for some, red meat. At the same time, consumers also want restaurants to offer their favourite indulgent treats.
Consumers and the planet
Consumers are becoming more concerned about sustainability and climate change as they use their purchasing power to support companies that share their beliefs. Consumers are more likely to shop sustainably if doing so requires no changes to their lifestyle and no additional costs.
Consumers returning to shopping centres
Shopping centres, which tend to have alternative power, have recovered from their pandemic slump, and consumers are spending more time in these environments. In addition, hospital foot counts are up, which supports restaurants in those locations. Conversely, foot counts at airports have not recovered to pre-pandemic levels as South Africans forgo travelling for business or leisure.
| * | https://www.news24.com/news24/bi-archive/sa-loves-chicken-2018-6 |
How we respond
With the shift from restaurant dining to dining at home-dining, we have amplified our delivery services (both own delivery and through third-party food aggregators) to extend our footprint. We continue to roll out smaller formats at convenient locations and grow our drive thru restaurant footprint. Our menus and packaging are designed to meet the needs of an at-home dining experience in taste and presentation.
In 2023, we acquired a majority shareholding interest in Lexi’s Healthy Eatery, a Casual Dining plant-based restaurant brand. Unfortunately, the brand’s performance did not meet our expectations and we closed all outlets. However, we still believe in the potential of plant-based menu options, and we have launched two Lexi’s products (burgers and falafels) in retail stores. We are also including more plant-based options on our menus for selected brands.
We cater for more health-conscious consumers by providing easy-to-understand information about ingredients and kilojoules across our Leading Brands’ menus. We comply with industry legislation regarding salt and sugar consumption and continuously monitor it. Some menus provide low-kilojoule meal offerings.
While we do not have an exclusive chicken brand in our portfolio, we offer many chicken options on most menus. In 2023 and 2024, we trialled a Steers Fried Chicken brand. However, this trial did not meet our expectations and we have shelved it.
From a sustainability standpoint, we are minimising food waste, reducing the use of single-use plastics, and adopting more environmentally friendly packaging.
Famous Brands designs restaurants to draw in more foot traffic from younger patrons. This includes expanding our social media presence, offering many ordering options, and offering free Wi-Fi. Our marketing campaigns improve consumer engagement and boost sales. We monitor our brands’ social media activity and online reviews.
Read more about our sustainability journey.
A competitive tech-enabled market
The restaurant industry is undergoing a digital transformation, with establishments of all sizes adopting innovative digital solutions. Consumers expect a seamless digital experience when interacting with restaurants, including finding restaurants, ordering food, and paying for it.
The industry is creating holistic, interactive and data-enabled digital experiences for consumers who are searching for simplicity, options, and convenience. App-enabled food delivery is now a major category. The South African food delivery industry, including the growing grocery category, continues to evolve as consumers prioritise convenience, time-saving solutions, competitive pricing, variety and speedy delivery. Major retailers are investing heavily in this space and are capturing a share of meal delivery purchases from fast food delivery aggregators and restaurants.
How we respond
We participate in the delivery market through own delivery and partnerships with aggregators. Our delivery hub model trialled in 2024 has proven successful and we will scale this model in 2025. This is where one franchise partner takes over delivery for several restaurants in a defined area. This is a viable business model for the delivery hub franchise partner while removing the hassle of deliveries for other franchise partners.
We continue to make appropriate investments in consumer-facing technology. In October 2023, we acquired a strategic shareholding interest in Munch Software to digitalise our POS ecosystem.
At our restaurants, we are implementing self-ordering terminals, digital menu boards, and digital payment solutions. We are constantly looking for ways to use technology to improve the overall dining and delivery experience for consumers.
Read more about our investments in consumer-facing technology .