Is South Africa still a good destination for UK retail trade?

South AfricaIn historical terms, South Africa and the UK have had a complicated relationship. From South Africa’s fight for independence, through to the UK’s part in crippling Apartheid, relations were never simple. But since the end of Apartheid, Britain has been one of South Africa’s most important trade partners. 

South Africa sent more exports to the UK in 2002 than to any other country, and the UK was South Africa’s 3rd largest source of imports up until 2003. Over the following years, the numbers slipped, with South Africa looking for stronger partnerships in Africa.

Nonetheless, trade relations have remained strong in particular sectors. South Africa sends precious stones, metals, fruit and veg, and machinery to the UK en masse, while the UK sends turbo propellers and jets, machinery, vehicles and chemicals across. These sectors never seemed in any danger. Furthermore, in 2010 the UK was the leading country in terms of South Africa’s foreign direct investment stock. However, the Brexit vote has brought uncertainty to many of the UK’s important relationships.

Based on the recent past, British retailers should be considering expanding to South Africa. But in the current climate, is it still worth the risk?

Will South Africa and the UK strike a new trading deal?

First and foremost, concerned parties will be calculating the probability of a new trading deal between S.A. and the UK post-Brexit. While in the past a new deal would have been almost guaranteed, South Africa has shied away from trade deals in recent history. South Africa has concluded just one trade deal since 2009. On the other hand, it has terminated deals with various European states. Instead of partnering with western countries, South Africa has shown more interest in building trade relations with the rest of Africa.

South Africa is probably not about to harm its relationship with one of its most important trade partners. But Brexit has caused confusion and anxiety around the world, and much of that is due to uncertainty over Britain’s best interests. Will the UK look to set up the exact trade agreements they have while in the EU? And what will happen to their lesser priorities?

Regardless, trade will continue as it is necessary for both economies, and for that to happen, new deals are likely to be signed. While they may differ in details, they should allow for a smooth continuation of trade and investment.

Which is why UK retailers should not shy away from expanding to South Africa, where there is an established market for UK goods.

Hottest opportunities in South Africa

The manufacturing sector provides some of the biggest opportunities for retailers in South Africa. As a country in which the gap between the rich and the poor is monumental, there are opportunities on a number of levels. Within poorer communities, finding new means of service provision is crucial, and cost effective manufacturing is highly valuable.

More wealthy communities are always looking to keep up with the best the western world has to offer, whether new technology or fashion.

Fashion is a particularly big sector in South African industry, with fashion outlets dominating the huge proportion of malls throughout Johannesburg.

Opening a South African branch

It’s tempting to operate solely from the UK, but opening a South African branch has its advantages. While you’ll need a business visa, for which you will have to present a convincing business plan and proof of concept, the requirements are otherwise minimal.

More importantly, labour costs in South Africa are far lower, due to the lower cost of living, as well as the weakness of the South African rand. Menial labourers are available for next to nothing without the same moral murkiness of exploitation, seeing as it’s possible to live on a lot less there than it is in the UK.

Indigenous raw materials are also cheap, and manufacturing the exact same product can be significantly cheaper in South Africa than it is in the UK.

The ZAR/GBP pairing, post-Brexit

South Africa’s currency, the rand (ZAR), has been an especially poor performer against the pound sterling (GBP). Before the Brexit vote, the ZAR was trading at around R22 for each £1. Post-Brexit, the pound fell significantly against most currencies and, at time of writing, you can get £1 for just R18.37.

This can work for you or against you. If you’re opening up or running South African branches, labour may not seem as cheap as it once did. Nor do raw materials. On the other hand, any payments you receive in rands will convert at a better rate than previously.

If however you’re operating solely from the UK, the dip in the pound’s value can be highly beneficial. Consumers who were once unable to purchase your products due to the high exchange rate, can now afford them at the same price. You can market to a larger audience, and not just those willing to pay premium for UK products.

Limiting the costs of foreign exchange

One of the problems you’ll face in any foreign market is the actual costs of exchanging currency, regardless of the exchange rates. Banks will charge high fees on every single transaction, and will invariably give you an inferior exchange rate to the mid-market rate. Companies like Transferwise have repeatedly pointed to this as a way of hiding extra fees.

Which is why, if you plan on trading internationally, you should consider using a foreign exchange firm. These companies, geared specifically to Forex, charge much lower fees, and give you much better exchange rates. They also help with the process, and provide options for those unwilling to risk the fluctuations of the Forex market. For example, you can use a forward contract to secure an exchange rate for up to 2 years, thereby keeping your income stable.

You can read more on making international transfers to and from South Africa here.

Summary

In conclusion, there is still good cause to take advantage of South Africa and the UK’s trade relations. While the future is uncertain for the UK due to possible consequences of Brexit, it’s unlikely that this particular relationship will fall apart. Furthermore, setting up branches in South Africa is easy and cost-effective, especially if you go about it smartly and avoid paying over the top prices for foreign exchange.