The retail industry is stuck between the devil and the deep blue sea, but sector bosses say difficult trading conditions will not get the better of them.
On the one hand, there is the pressure of rising food prices and input costs. On the other, consumers are tightening their purse strings.
Over the past week, the Shoprite Group, Massmart, RCL Foods and the Spur Corporation all announced their results.
Although all four show sales growth, the challenging trading conditions in South Africa took their toll.
In addition, the economic environment is forecast to get tougher this year, with local growth expected to be just below 1%.
With the drought and the weak rand exchange rate pushing import prices sky high, double-digit food inflation is in the offing for South Africa.
This comes at a time when consumers’ purchasing power is already being hurt by higher interest rates on debt, rising service costs and unemployment.
“It will be a tough year. Consumers are really suffering,” said Rob Field, financial director of RCL Foods.
“Feedback from the retail industry is that consumers are spending less. Negative growth in real consumer spending is expected over the next 12 to 18 months.”
According to Abri du Plessis, CEO of Gryphon Asset Management, business will become even more difficult when the ripple effect of the huge rand weakening in December works its way through to inflation.
Inflation for January 2016 is sitting at 6.2%, which means interest rates will rise further.
“The average consumer usually feels an interest rate rise first in his pocket because his debt level is so high,” said Du Plessis.
“This will put further pressure on his purchasing power.”
Du Plessis said that this year, the industry would also not get the benefit of the strong growth in civil servants’ salaries and social allowances that it enjoyed over the past few years.
Both these factors were curtailed by the recent budget.
“The country is sitting in the middle of one of the worst droughts, which puts massive pressure on food inflation, while the volatility of the rand just makes import prices more expensive,” said Pierre van Tonder, the CEO of Spur.
“Food inflation of 15% to 20% cannot be passed on to the consumer. That’s when the marketing and product offerings must become more innovative.”
He said the competition in the restaurant industry was even tougher because many new brands are entering the market.
“However, they all feel the same pain.”
Given the aggressive competition that exists between retail groups, consumers can expect more innovative promotions and product packaging.
Whitey Basson, CEO of Shoprite, said the group would continue to subsidise basic foodstuff and use tactical promotions to boost its sales.
He said while a significant increase in red meat prices was expected, there would also be a stronger focus on white meat, which would support its product sales.
RCL’s Field said they also expected that more expensive red meat would lead to a shift to more affordable protein.
However, this will not offset the excess of poultry imports that the industry is facing.
Du Plessis said retailers of durable and semidurable goods were expected to suffer acutely. “But the experienced players in the industry will not be brought to their knees,” he added.
Basson said although it would not be an outstanding year for the overall retail industry, he expected reasonable results from Shoprite.
To achieve growth, Field said, much attention would be given to cost-efficiency by industry synergy, product innovation and savings on overheads.
Groups such as Spur, Massmart, RCL and Shoprite are also focusing on greater geographical diversification, further into Africa, to support long-term growth.
“Spur is 50 years old and has survived three recessions and difficult trading conditions. We will do it again,” Van Tonder said.