SHOPS BUCKLE UN­DER EX­PENSE PRES­SURES

SA re­tail­ers are find­ing it dif­fi­cult to deal with in­fla­tion, com­pe­ti­tion and credit re­stric­tions, writes Stafford Thomas

Financial Mail - Investors Monthly - - Cover Story -

Tough eco­nomic times are guar­an­teed to show up how ro­bust cor­po­rate strate­gies are. And nowhere is this truer than in the re­tail sec­tor, where a bat­tle royal is rag­ing to cap­ture dwin­dling con­sumer spend­ing power.

The strug­gle is es­pe­cially fierce in the cloth­ing re­tail seg­ment, where char­ac­ter­is­tics of a per­ma­nent struc­tural change are in­creas­ingly ev­i­dent.

Not the least of the fac­tors un­der­ly­ing this change is a rapid de­cline in the use of credit to drive sales.

The de­cline was trig­gered by credit re­tail­ers who re­sponded to ris­ing bad debts by tight­en­ing lend­ing cri­te­ria. Gov­ern­ment also stepped in, en­trench­ing the de­cline in credit ex­ten­sion growth when, in Septem­ber 2015, it in­tro­duced af­ford­abil­ity reg­u­la­tions en­forc­ing strict lend­ing cri­te­ria.

“They [the new credit reg­u­la­tions] have cost the cloth­ing re­tail in­dus­try bil­lions in lost sales,” says An­thony Thun­strom, chief fi­nan­cial of­fi­cer of The Fos­chini Group (TFG).

With credit hard to come by, re­tail­ers who have been tra­di­tion­ally heav­ily de­pen­dent on credit to drive sales have lost their grip on some cus­tomers. The re­ac­tion of many of those cus­tomers is to take what cash they have and spend it where they get the best deal.

Con­sumers are also no longer sat­is­fied with sea­so­nend sales. They want dis­count prices ev­ery day. In the UK this has led to cut-throat com­pe­ti­tion, which has brought about steep de­fla­tion in cloth­ing prices over the past four years. Cloth­ing prices slumped 6% in 2015 and a fur­ther 7% in the 12 months to Novem­ber 2016.

Whether SA will see any­thing as bru­tal re­mains to be seen. But ag­gres­sive dis­count- ing dur­ing the 2016 fes­tive sea­son sug­gests the pres­sure is on.

Evan Walker of 36One As­set Man­age­ment says: “In the runup to Christ­mas, Wool­worths had a huge [cloth­ing] pro­mo­tions drive. Prices were slashed by 30%-40%.”

What sales would have looked like with­out dis­count­ing is a mat­ter of con­jec­ture. But even with dis­count­ing, Wool­worths re­ports (in a trad­ing up­date for the 26 weeks to De­cem­ber 25) that SA cloth­ing sales vol­ume was down 3.8% year on year af­ter ad­just­ing for 7.3% in­ter­nal in­fla­tion. On a like-for-like (same store) ba­sis, sales vol­ume fell 6.1%.

SA’s cloth­ing re­tail­ers have, in re­cent years, also found them­selves con­fronting a new com­pet­i­tive dy­namic: for­eign re­tail­ers. The two most se­ri­ous com­peti­tors to emerge are Aus­tralian group Cot­ton On and Swedish gi­ant H&M.

Cot­ton On came to SA in

The rapid change in the cloth­ing re­tail land­scape has caught some lo­cal play­ers off bal­ance

Wool­worths … huge pro­mo­tions drive be­fore Christ­mas

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