Our Operating


South African context

GDP growth in the local market remains lacklustre and business confidence is at a five-year low. The upward interest rate cycle is gaining momentum, having increased by 200 bps over the past two years. In addition, unemployment and political uncertainty remain a concern.

According to the Bureau of Economic Research (BER), inflation is expected to average 6,6% in 2016 and 6,4% in 2017, while GDP is expected to slow even more in the next 12 months. Risks to inflation remain high, including rising food prices, potentially rising oil prices and continued exchange rate volatility. Underlying market conditions therefore remain unsupportive of any meaningful acceleration in consumer spending, and rising interest rates put pressure on credit consumers.

South Africa’s fiscal policy is tightening, but short-term expectations continue to be challenging, with growth forecast generally being downgraded.

Sustainability continue to receive focus and according to a recent PWC article, Make it your business: Engaging with the Sustainable Development Goals (A South African perspective – March 2016), businesses in South Africa are currently prioritising the following sustainable development goals:

  • Inclusive and sustainable economic growth
  • Inclusive and equitable quality education and the promotion of lifelong learning opportunities for all
  • Sustainable consumption and production patterns
  • Resilient infrastructure, inclusive and sustainable industrialisation and innovation
  • Urgent action to combat climate change and its impact

Clothing retail

In the South African retail sector, profitability remains under pressure due to sharp increases in purchase prices, which are being driven upward as a result of a weak and volatile Rand. Accelerated consumer price inflation is forecasted for the 2017 financial year. This places further emphasis on the need to drive local production and to continue to optimise supply chain and sourcing arrangements.

Growth in real consumer spending improved slightly after the mining strikes in 2015, but remains slow. Most retailers are reporting lower volumes, which is expected to continue and worsen as consumers experience subdued growth in disposable income. Low levels of consumer confidence will also dampen overall spending.

The semi-durable sector is particularly sensitive to interest rate hikes, credit growth and consumer confidence levels.


The pressure on credit customers from the upward interest rate cycle, together with the negative impact of the Affordability Regulations on new accounts, limit the ability of credit retailers to achieve meaningful growth in credit turnover.

Risks and opportunities

Clothing retail and credit

While current consumer debt levels inhibit credit sales, our Rewards programme is aimed at stimulating both cash and credit sales, with the latter improving card usage. In addition, our online strategy and focus on local production continue to benefit customers. As part of ongoing bad debt management, an internal review of available credit products was undertaken to ensure we attract accounts that are less vulnerable to debt. Credit applications are reviewed for fraud indicators and assessed against NCA-compliant scorecards, credit bureau scores and employment details.

Emerging market context

At a macroeconomic level, Africa offers significant opportunities for economic growth and for retailers due to its large and relatively young population, continuing rapid urbanisation, and its wealth of natural resources.

However, optimism about the growth potential of sub-Saharan Africa’s consumer market is tempered by a combination of economic and political risk. Growth decelerated to roughly 3% in 2015, down from 4,5% in 2014. It is expected to hover around 3% in 2016. Currency depreciations raise the cost of imported goods, and difficulty in sourcing products due to small, local manufacturing sectors challenges the growth of retail markets. This is coupled with underdeveloped and poor connective infrastructure. Corruption, an often opaque regulatory landscape and the threat of government upheaval are further sources of political headwinds, with many countries carrying moderate to high political risk ratings.

Growing urban centres and a rising middle class do not necessarily translate into higher levels of economic growth and consumer spending. The vast majority of people are still exposed to poverty with high levels of unemployment. In most countries the focus will be on the fast-moving consumer goods (FMCG) segment, as most people are not able to afford durable or luxury goods.

Risks and opportunities

Careful consideration of the correct geographical location strategy in Africa and other emerging market territories is essential. We have demonstrated our ability to tailor the group’s risk management appetite to specific business activities and contexts. Our group operates in six African countries outside of South Africa, including Ghana and Zambia. These countries generally have well-established shopping cultures, a substantial middle class and developed infrastructure, and provide us with a solid foundation to expand into other countries at different stages of development. From countries with relative political and economic stability, the group can manage the scale of its expansion along Africa’s development curve in line with our risk appetite. Leveraging key partnerships and the ability to utilise the appropriate business model ensure that compliance risk is reduced.

Developed market context

The outlook for growth in developed and advanced economies remains modest and uneven. Risks to global growth relate to the outcome of the British referendum and the slowdown in China, followed by geopolitical instability and debt defaults.

In the EU, the immigration crisis and the concomitant rise of right-wing populist parties create financial uncertainty, exacerbated by negative interest rates. The US is similarly challenged by politics and simmering conflict in the Middle East. Developed market growth slowed sharply at the end of 2015 as Japan contracted and the US and Europe gained only 1%. Since then, global manufacturing has been struggling, while inventories are building. At the same time, developed market household spending has slowed to its lowest level in three years as financial and geopolitical uncertainties counter the benefits of the energy price windfall.

Analysts believe that critical success factors for retailers in developed markets include improving existing supply chain, incorporating digital technology into the physical store experience and identifying innovative ways to leverage existing real estate.

Risks and opportunities

Our expanding footprint into developed markets through the acquisition of well-established brands such as Phase Eight and Whistles provides opportunities for growth through diversification, while their unique business models facilitate further expansion. Key concession partnerships further support the expansion strategy. At the same time, the group is subject to the risk of customers, in most markets, being under pressure and the group potentially not being able to meet the demand for their desired merchandise at the right price and the right time. We thus continue to focus on stimulating demand through creative communication campaigns, data analysis, modelling techniques and appropriate systems and processes.

In addition, our strategic focus on creating integrated, secure omnichannel experiences will enable us to meet customers’ expectations in developed markets.


According to the Corporate Governance Network in its article, Governance issues for boards to consider in 2016, the following themes are particularly relevant in the governance landscape:

  • Cybersecurity: An increase in the number, cost and sophistication of attacks on business operations, which requires an understanding of data protection, storage and sharing requirements.
  • Emerging technologies: Technological and digital developments are impacting the customer experience and the method of delivering products and services. This demands changing business processes, which brings complexity and new risks.
  • Shareholder activism: Shareholders are increasingly influencing and impacting businesses through their compliance and communication demands.
  • Corporate and integrated reporting: By issuing an integrated report, a company increases the trust and confidence of its stakeholders and the legitimacy of its operations. The use of and need for integrated reporting is growing fundamentally.
  • Compensation: There is a growing demand for increasing disclosure on remuneration.
  • Value creation and strategy: Successful strategy must be engaged, focused, results-oriented and disciplined with appropriate committee structures to support it.
  • Risk oversight: A balanced risk approach is necessary to enable businesses to progress, develop and grow. The board’s risk appetite is critical.
  • Crisis management: Strategic planning should ensure that crisis scenarios be anticipated or pre-empted, with the necessary assurance that the business has a robust response.
  • Overlegislated and overregulated landscape: Legal compliance requirements are increasing and demand a strategic understanding to be able to integrate into business management and planning.
  • Social media: As an effective stakeholder communication tool, social media can promote and inform, but needs to be appropriately managed to protect a company’s reputation.
  • Sustainability: Maintaining a balance between the complex interplay of nature, society and business demands requires ongoing focus.

As a result of this changing landscape, the business environment requires a matching and appropriate skill set from a board. Business will benefit from leadership that is diverse in its composition and able to drive progressive and forward thinking. With this in mind, we made changes to the board this year to supplement the existing skills to ensure the combined skill sets support our growing international presence. We have a diverse, dynamic and well‑qualified board to lead our group responsibly towards our growth targets.

Our business continues to be affected by growing government policy changes and requirements. Similarly, our business is affected by numerous voluntary frameworks, directives, rules and guidelines, many of which focus on social, environmental and governance aspects.

Key regulatory and non-binding instruments affecting and influencing our South African business includes the following:

  • Consumer protection legislation, such as the National Credit Act, Consumer Protection Act and the Protection of Personal Information Act (partly effective)
  • Labour law legislation, such as the Labour Relations Act, Employment Equity Act, Basic Conditions of Employment Act and the Broad-based Black Economic Empowerment Act
  • Tax legislation, such as the Income Tax Act, Value-added Tax Act and employment-related tax legislation;
  • Legislation and instruments on companies and good corporate governance, such as the Companies Act, the JSE Listings Requirements and the King Code of Corporate Governance (King III and the draft King IV)
  • Non-binding initiatives, such as the Carbon Disclosure Project, Water Disclosure Project, Kimberley Process and the Global Reporting Initiative (GR4)

Key regulatory and non-binding instruments affecting and influencing our African business includes the following:

  • Consumer protection legislation, such as the Consumer Protection Act in Botswana, the draft Consumer Credit Bill in Swaziland and the Data Protection Act in Ghana;
  • Labour law legislation, such as the Employment Services Act in Namibia
  • Tax legislation and legislation on companies, such as the various Value-added Tax Acts, employment-related tax legislation and Companies Acts in the African countries in which our business trades
  • Empowerment initiatives and legislation, such as the New Equitable Economic Empowerment Framework and the National Equitable Economic Empowerment Bill in Namibia and the Citizens Economic Empowerment Bill in Swaziland
  • Voluntary charters to promote local procurement, such as the Namibian Retail Charter

Key regulatory and non-binding instruments affecting our international business includes the following:

  • Data protection legislation
    • Data Protection Act – Phase Eight processes customer and employee data which are processed fairly and stored for as long as required to fulfil the purpose for which it was gathered. Any loss/publication of personal data (whether of customers or employees) due to a cyber incident, negligence or failure to comply with the Data Protection Act could lead to negative press and fines.
    • Payment Card Industry Data Security Standard (PCI DSS) – this is not a regulatory requirement; however, Phase Eight is categorised as a “Level 3” merchant due to credit card transaction numbers. As such, Barclaycard measures its compliance towards certification. PCI DSS gives customer confidence when making online purchases – the consequences of losses/fraud are reputational damage and fines.
  • Consumer Rights Act – this governs statutory implied terms and remedies in consumer contracts for goods, enforcement of consumer protection law, clarified periods for repair, replacement and refunds for goods.
  • Consumer Credit Act – Phase Eight is registered for limited permission because certain department store partners with whom there are concessions offer store credit cards, and Phase Eight staff may assist the stores by informing customers about the benefits of store credit cards and where to sign up; this may be deemed to be an introductory service and therefore a secondary broking activity. A lower standard of reporting and compliance with the Consumer Credit Act is required for limited permission.
  • UK Companies Act – Phase Eight (Fashion & Designs), the UK operating company, and 12 of its subsidiaries are UK-registered companies and therefore subject to the provisions of the UK Companies Act on statutory filings and accounting, and a patchwork of legislation/regulations that apply to all UK companies (e.g. environmental, supply chain (Modern Slavery Act, etc.)).
  • Employment legislation (Phase Eight has approximately 1 800 UK employees) – the introduction of The National Minimum Wage (Amendment) Regulations 2016 (since 1 April 2016) by law, means that all workers within the UK are now entitled to an increased national minimum wage per hour.

New legislative requirements have a cost implication on our business, as does new non-binding measures and policy instruments. Where our business is not directly affected by a new measure, it is often the case that it is indirectly affected because the measure may have the effect of reducing a consumer’s discretionary income, thereby potentially slowing consumer spending.