Retailers’ outlook is gloomy amid slower sales
High prices for essentials put consumers’ pockets under strain
A MODERATION in consumer spending has led to a deterioration in trading conditions in the retail sector, with no respite on the horizon as disposable income continues to be eroded. The latest Ernst & Young-Bureau for Economic Research survey, released yesterday, revealed evidence of a further slowdown in retail sales volumes in the first quarter of the year.
A MODERATION in consumer spending has led to a deterioration in trading conditions in the retail sector, with no respite on the horizon as disposable income continues to be eroded.
The latest Ernst & Young/ Bureau for Economic Research (BER) survey yesterday showed evidence of a further slowdown in retail sales volumes in the first quarter of the year.
This confirms what major retailers such as Shoprite, Massmart and Truworths have cautioned — that the long-threatened consumer spending slump is well under way.
Higher prices for essentials such as food, transport and electricity have put added strain on the purchasing power of households, particularly among the lower income groups that spend a large proportion of their monthly disposal income on nondurable goods such as food‚ beverages, pharmaceuticals and cosmetics.
A slowdown in unsecured lending has in all likelihood also started to weigh on the finances of lower- and middle-income consumers, providing less stimulus to the retail sector.
Derek Engelbrecht‚ retail and consumer products sector leader at Ernst & Young said that during the first quarter of the year, sales volumes of nondurable goods were particularly disappointing‚ while sales growth in the semidurable goods retail trade of clothing‚ footwear‚ toys and CDs also waned.
“The slowdown in nondurable goods sales growth since mid-2012 can in all likelihood be ascribed to the lacklustre pace of job creation during the second half of 2012 and soaring food, fuel and electricity prices,” Mr Engelbrecht said.
Africa’s largest grocer, Shoprite, reported a 12.5% rise in first-half profit, amid sluggish consumer spending by its core lower living standards measure target group.
CEO Whitey Basson said there were no indications that the cost pressures on consumers would ease in the short term.
Meanwhile, noting the difficult consumer environment, Massmart CEO Grant Pattison said the group was concerned that sales growth may be under some pressure for the remainder of the financial year.
Though its sales grew 14.7% to R36.2bn, net profit fell 20% to R722.4m in the 26 weeks ended December 23. Mr Pattison said profit was weighed down by the costs of Walmart’s acquisition of a 51% stake in the local retailer.
“Fuelled by the sharp depreciation in the rand exchange rate over the last year, import prices of clothing, footwear, toys and CDs soared, putting downward pressure on the profit margins of semidurable goods retailers,” Mr Engelbrecht said.
In February, Truworths reported a 19% rise in first-half profit, but said it expected the credit environment to deteriorate owing to rising levels of consumer indebtedness.
Interestingly, the survey showed a bit of a recovery in sales volumes of durable goods such as furniture, household appliances and electronic goods.
“This may well reflect some pre-emptive buying by consumers in anticipation of further price hikes in the wake of the depreciating exchange rate. However, the resilience of durable goods sales volumes, compared with faltering nondurable goods sales, also points towards less financial strain on high income households compared to low income families,” Mr Engelbrecht said.
Upmarket retailer Woolworths, which typically targets the more affluent customer, said while economic conditions in SA would remain constrained, especially in the lower and middle income segments where consumer debt levels remain under pressure, the upper income segment in which it operates continues to show some resilience.
“Trading for the first six weeks of the second half of the financial year has been positive,” Woolworths said in February.
Household and consumer strategist at FNB, John Loos, expects real retail sales growth to moderate further this year.
“After having slowed significantly through 2012, real retail sales growth is expected to settle between 2% and 3% in 2013,” Mr Loos said.
According to Mr Engelbrecht, subdued local conditions would add urgency to retailers’ Africa expansion plans, as they seek further avenues of growth.