Why procurement of goods not for resale has become one of retail’s biggest untapped opportunities to improve profitability.
As South African retailers navigate sluggish consumer demand, rising operating costs and relentless pressure on margins, the next wave of cost optimisation may have less to do with the products on store shelves and more to do with everything that supports them.
Industry experts say procurement of goods not for resale (GNFR) – everything from store fittings and staff uniforms to marketing materials, technology, logistics services, facilities management and packaging – has emerged as one of retail’s biggest untapped opportunities for improving profitability.
Unlike merchandise procurement, which receives constant executive attention, GNFR spending is often fragmented across departments and managed independently by marketing, operations, IT, HR and finance.
Global consulting firm McKinsey estimates that indirect procurement typically accounts for 10% to 15% of a retailer’s sales, yet remains significantly under-optimised. Retailers that adopt a strategic, cross-functional approach to managing these categories can reduce indirect expenditure by 10% to 15%, generating improvements of 1% to 2% in return on sales.
“For an industry where net profit margins are often measured in single digits, those savings can be material,” says Malcolm Herbert, Chief Financial Officer at Sapphire. “Retailers have become exceptionally sophisticated at negotiating the products they sell, but far fewer apply that same discipline to the thousands of purchases required simply to operate the business.”
“GNFR procurement has traditionally been viewed as an administrative function,” he adds. “In reality, it is a strategic financial lever, where every rand saved on non-merchandise expenditure flows directly to the bottom line without requiring a single additional sale.”
This opportunity extends well beyond supplier negotiations, he notes. “Increasingly, procurement specialists are using spend analytics, supplier consolidation, specification reviews and demand management to reduce costs while improving operational outcomes.”
That, he explains, could mean redesigning packaging to reduce transport costs, rationalising supplier bases, standardising specifications across store networks or sourcing products that improve employee engagement and brand consistency.
McKinsey argues that the strongest-performing retailers are shifting procurement from a transactional buying function to a business-wide capability that combines finance, operations and commercial decision-making. Rather than simply asking suppliers for lower prices, organisations are questioning whether they are buying the right products, in the right quantities and through the most efficient channels.
“Sapphire has seen this shift play out across several of South Africa’s largest retailers and corporates,” he explains. “One major national retailer has realised more than R150 million in procurement savings through our GNFR programme over the lifetime of the partnership, while similar procurement optimisation programmes for leading banking and energy companies have delivered significant savings through strategic sourcing, bulk purchasing, print management and national distribution.”
South African retailers, financial institutions and other large corporates are increasingly recognising the value of this broader approach as procurement shifts from a purchasing function to a strategic cost optimisation discipline.
Herbert says these results demonstrate why indirect procurement deserves far greater executive attention. “Small percentage improvements across multiple categories quickly translate into millions of rand,” he adds. “The misconception is that these categories are individually too small to matter, but collectively, they often represent one of the largest unmanaged cost centres in the business.”
“Businesses often focus on the largest line items because that’s where the spend is most visible, but when you aggregate hundreds of categories across marketing, uniforms, office supplies, logistics, facilities and technology, the opportunity becomes substantial,” he explains. “Small percentage improvements across multiple categories quickly translate into millions of rand.”
He adds that procurement is also becoming increasingly important in managing supply chain risk.
“The conversation has evolved from cost reduction alone as businesses are asking whether suppliers can deliver consistently, support sustainability objectives, provide innovation and simplify increasingly complex procurement requirements across multiple business functions,” he says.
“With inflationary pressures, constrained consumer spending and continued economic uncertainty expected to persist, analysts believe retailers will increasingly look beyond traditional cost-cutting measures,” he adds. “As procurement evolves into a strategic business function supported by data, technology and cross-functional governance, the greatest opportunities may lie not in what retailers sell but in everything they buy to keep their businesses running.”
