Cash is a bet­ter bet than credit as rates are likely to rise, but it still won’t be the cure-all for re­tail com­pa­nies, writes Ron Derby

Financial Mail - Investors Monthly - - Contents -

Con­sumer spend­ing goes rapidly off the boil

The good-news story that was the credit-fu­elled spend­ing of the South African con­sumer over the past six years came to its abrupt end this year with the col­lapse of African Bank, the big­gest un­se­cured lender in the coun­try.

It was long in com­ing, but the slow­down in the econ­omy caused by labour ten­sions (es­pe­cially strikes in key sec­tors like min­ing and man­u­fac­tur­ing) and poor global growth al­ways fore­told a story of ris­ing un­em­ploy­ment and con­sumer in­debt­ed­ness.

De­spite the con­sumer woes, South African re­tail­ers and in par­tic­u­lar cash-fo­cused op­er­a­tors such as Mr Price had a spec­tac­u­lar year on the Jo­han­nes­burg Stock Ex­change.

Should strike ac­tiv­ity not match the lev­els ex­pe­ri­enced this year, there should be a con­sis­tent flow of wages and salaries

The over­all re­tail in­dex gained over 16% for the year to Novem­ber 20, driven by the Dur­ban-based Mr Price’s more than 44% ap­pre­ci­a­tion. The Fos­chini Group, which in­creased its cash business as a per­cent­age of over­all sales to 44%, man­aged just as spec­tac­u­lar a rise, up 43%.

Mr Price’s mar­ket value is now almost three times that of the com­bined mar­ket cap of the coun­try’s three big­gest con­struc­tion firms — Mur­ray & Roberts, Wilson Bayly Holmes Ov­con and Group Five.

Ear­lier this month, Fos­chini was raised to “out­per­form” from “neu­tral” by Credit Suisse.

The old adage “cash is king” is cer­tainly the rule that fol­low­ers of re­tail shares have stuck to over the

course of the year. Will it con­tinue into next, or are there some rays of hope for those re­tail­ers heav­ily ex­posed to the credit con­sumer? If not, we should see a con­tin­ued push to re­duce store credit cards in favour of cash.

Next year “the con­sumer will re­main un­der pres­sure and the more cash-based re­tail­ers will get bet­ter re­sults”, says Alex Sprules, an­a­lyst at Imara SP Reid.

Re­tail­ers will con­tinue look­ing to grow their cash sales as a com­po­nent of over­all sales as it is more de­fen­sive, he says.

Of the fash­ion re­tail­ers that haven’t man­aged to change their model, Tru­worths has been the lag­gard. Some 70% of its sales are credit-based and with bor­row­ing be­ing slowed down, its shares have been among the worst per­form­ers.

Shares in Tru­worths, whose found­ing chief ex­ec­u­tive of­fi­cer Michael Mark re­signed ear­lier this month, have de­clined 7.2% this year. Over the past two years, the re­tailer has plunged 28%.

“Credit is go­ing to take a long time to re­cover,” Sprules says.

The en­vi­ron­ment isn’t go­ing to get any eas­ier for con­sumers next year, given the in­ter­est rate out­look for the coun­try.

Though Re­serve Bank gov­er­nor Le­setja Kganyago didn’t raise rates in his first act as leader of the bank, the coun­try is in a tight­en­ing in­ter­est rate en­vi­ron­ment, along with other emerg­ing mar­kets.

With in­fla­tion fall­ing just within the bank’s tar­geted 3%-6% level and oil prices on the de­cline, the mon­e­tary pol­icy com­mit­tee de­cided to leave rates un­changed in its last meet­ing for the year.

Over the course of the year, the bank has raised rates twice — a com­bined 75 ba­sis points — as the in­fla­tion dragon has raised its head on the back of a weak­en­ing cur­rency.

Emerg­ing mar­ket cur­ren­cies have weak­ened as the US econ­omy’s per­for­mance has im­proved, which has pushed in­vestors search­ing for bet­ter growth prospects to buy into US as­sets. And in re­sponse to that im­prov­ing econ­omy, the US Fed­eral Re­serve has with­drawn quan­ti­ta­tive eas­ing. Mar­kets are

South African re­tail­ers had a spec­tac­u­lar year on the Jo­han­nes­burg Stock Ex­change

now gear­ing them­selves for a pos­si­ble rate hike in the world’s big­gest econ­omy for the first time in close to a decade.

Th­ese de­vel­op­ments have pushed emerg­ing mar­ket coun­tries to follow their lead by rais­ing rates as well.

In­ter­est rates “will go up in the sec­ond half of the year”, says Ned­bank chief economist Den­nis Dykes. “It’s go­ing to be pretty much the same as this year.”

As gloomy as the con­di­tions may be for South African con­sump­tion, which made up just over 60% of the coun­try’s gross do­mes­tic prod­uct in the first half of the year, there is a smidgen of good news.

Should strike ac­tiv­ity not match the lev­els ex­pe­ri­enced this year, such as the five-month plat­inum min­ing strike, there should be a con­sis­tent flow of wages and salaries.

This should support some level of con­sumer ac­tiv­ity, but there won’t be the “big thrust” from the con­sumer that comes with growth in em­ploy­ment, Dykes says. We are “not ex­pect­ing strong re­lief from em­ploy­ment growth”, he says. Un­em­ploy­ment de­creased to 25.4% in the third quar­ter of this year from 25.5% in the sec­ond quar­ter of 2014.

Not all cash-friendly re­tail­ers have done well in mar­kets over the course of the year.

Mass­mart, owned by Wal­mart, has had a pedes­trian 2014, with shares in the company fall­ing by just un­der a per­cent.

The fo­cus for the company has been on get­ting a food of­fer­ing into its Game stores, some­thing which has run into dif­fi­culty. Ri­vals Pick n Pay and Sho­prite have gone through the fine print in their lease agree­ments at some of the coun­try’s ma­jor malls for a pro­vi­sion that pre­vents any of their ri­vals from of­fer­ing food in their out­lets. The scrap has “dis­tracted them a lit­tle bit”, Sprules says. “When the Game brand was go­ing into food, ev­ery­one got ex­cited.”

The in­abil­ity to de­liver has put pres­sure on the share as its Game brand has been a long-time un­der-per­former.

Sho­prite hasn’t per­formed much bet­ter, also com­ing just un­der a per­cent weaker for the year to date. Pick n Pay, whose share has un­der-per­formed its peers for the best part of six years, gained 6.3% in value.

The lower end of the con­sumer mar­ket has been most af­fected by the de­cline in un­se­cured lend­ing, a key de­mo­graphic in its store port­fo­lio. Along with a strug­gling shop­per, Sho­prite has had to bat­tle for mar­ket share with Pick n Pay.

Sho­prite will have opened over 107 stores by year end, while Pick n Pay, which has been strug­gling with a shrink­ing share of the mar­ket, opened 41 new stores in the first half of its fi­nan­cial year and plans to ex­ceed that fig­ure in the six months to March.

The Wool­worths story for the past year has mostly been about its Aus­tralian ex­pan­sion and con­sol­i­da­tion of its lo­cal business.

Whether its four-man ex­ec­u­tive team will lose fo­cus on its prof­itable lo­cal op­er­a­tions over the next few years is what the mar­ket most wants to know. Get­ting syn­er­gies to work at a dis­tance of more than 11,000km is go­ing to be a test. Over the year, Wool­worths’ share has gained just over 10%.



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