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Consumer Affairs
Thursday, March 1, 2012
Product revolution

The margin squeeze on traditional retail products, driven by fierce competition in the South African retail industry is sending a stream of South African retailers north into the continent. Stiff competition has also seen a product revolution as retailers move into the financial services, transport, logistics and manufacturing space in an attempt to improve margins or market conditions through more effective supply chain management, efficiency controls and cost management.
For retail businesses to survive in such a competitive market they do, however, need to innovate and evolve - ideally faster than the competition.
This, inevitably, involves risk.
Even before the arrival of Walmart (which increases the competition for many retailers due to their wide product range), South African mass market retailers selling similar products to the same market are seeking more effective market penetration, and new avenues of profit, by offering clients both hire purchase facilities and insurance cover on goods’ purchased.
This practice has rapidly evolved into offering “goods insurance, life cover and unemployment insurance,” explains Elizabeth Cameron, Divisional Manager, Manufacturing, Marsh Africa.
While selling personal finance products represents a new retail opportunity in a tight market the “practice needs to comply with the legislation set down by the Financial Advisory Services Act (FAIS),” she warns.
This Act strives to protect consumers of financial services, ensuring that customers are provided with adequate information to make informed decisions about their financial product purchases. Retailers who offer credit on products sold have to comply with the requirements of the National Credit Act. The FAIS Act also dictates the manner in which goods, life and unemployment insurance is sold. As such, “retailers have to ensure that they provide consumers purchasing a lounge suite on credit, for example, with the correct financial advice delivered by properly qualified financial advisors,” explains Cameron.
Furthermore, any new insurance products being bought to market now require FAIS approval and accreditation, eliminating the “first-to-market advantage that these products relied upon to corner the market briefly before they were imitated,” says Cameron.
Other legislation playing havoc with both retailer’s margins as well as the efficiency of their business is The Consumer Protection Act, which puts the entire supply chain under the spotlight.
In response, “retailers have developed compliance departments to ensure they do not fall foul of this growing web of legislation,” adds Cameron.
Since current insurance policies do not, however, adequately cover the risk that retailers run with regard to the protection of their client data, protecting customer’s personal information is always at the forefront mind for retailers’ minds when offering insurance and credit facilities. Certainly, the soon-to-be promulgated Protection of Information Act will regulate the manner in which retailers secure the personal information contained in their customer base.
Either way, “stiff penalties will be the order of the day for retailers who cannot prevent or manage a breach of their system,” warns Cameron.
Another area of risk where retailers are working hard to reduce costs and improve margins is the trend to assemble white goods from imported component parts - rather than importing these. This has evolved the role of the modern retailer from a purely importing, distribution and sales function to include a light manufacturing function with associated risks and obligations.
Retailers are also working to improve their efficiency and cost effectiveness by developing national distribution centres close to the origin of the goods they sell. The physical risks in these warehousing centres is often costly, driven by the necessity of installing sophisticated fire and security protections, the cost of which take many years to recoup.
Further afield, in other Africa territories, retail businesses often face very different risks particular to the continent.
Beyond the well-known political risks, which continue to change across a range of African territories, the risk of falling foul of each country’s different legislations is a challenge for retailers entering the African market.
“Following our clients into Africa in their quest to tap other markets, as well as establishing our own operations on the ground in most territories, has taught us that insurance, investment, product purchase, employment and profit repatriation are governed by very different legislation in each African territory,” says Cameron . Unless guided by on-the-ground expertise and contacts, retailers in Africa run substantial and varied risks in each territory.
As such, a flexible and organic risk management philosophy dealing with the full range of risks present in the South African and other African markets , while still allowing a business to take risks, innovate and grow should assist retailers’ to:
• Protect their physical risk so as to avoid the frequent losses which both interrupt the business and increase the cost of traditional insurance purchased to cover catastrophe losses;
• Avoid breaches to the security of their data while complying with the new Protection of Information Act;
• Ensure continued compliance with legislation while also purchasing the right cover to protect retailers’ provision of professional and financial services in line with the requirements of the FAIS Act; and,
• Maintain the standards required to avoid potential liability risks from both consumers and employees.

Cameron predicts that “compliance with legislation and protection of personal information will become be the most challenging of risks that a retailer will face in the very near future.”

Copyright © Insurance Times and Investments® Vol:25.3 1st March, 2012
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