Financial Mail - Investors Monthly
WILL FUEL RELIEF HAVE LEGS?
Unfortunately, not all the fundamentals of a robust consumer economy are in place, writes Andile Makholwa
The sharp fall in the oil price has brought an unexpected windfall to South African consumers, who have battled to recover from the economic slump of 2009.
This should be good news for retailers, as a little boost in consumers’ disposable income implies more spending. However, this time around it may not work out like that, as not all the fundamentals of a robust consumer economy are in place.
From the record high of $112/bbl in June, the price of crude oil has dropped significantly, to below $60/bbl at the time of writing.
Economists expect it to remain at this level for some time, or to drop even further.
In SA, the decrease has translated into a considerable drop in the price of fuel. For instance, motorists in the inland regions now pay R10,31 for a litre of 95 octane unleaded petrol — a huge relief from last year’s average price of R13,84. A motorist who puts in 50 litres three times a month stands to save more than R6 000 this year if the oil price remains under $60/bbl and the rand doesn’t weaken beyond R11,30 against the dollar.
Transport costs make up about 16% of the average South African’s household spending.
FNB chief economist Sizwe Nxedlana says the reduction in the price of petrol is a “massive benefit” to the consumer, as all of it is after-tax money. He expects the decline in the petrol price to knock about 1% on average off inflation, which would translate into average CPI of 3,5% this year. Less bullish economists estimate CPI to average 4,2%, which would be the lowest in 10 years. Last year it averaged 6,1%.
Mike Schussler, director at Economists.co.za, says the average motorist should have about R570 more in his pocket in February than in May last year.
“The BankservAfrica disposable salary data shows that in December the average disposable salary on payrolls in SA was R12 600. This means about 4.5% of the take-home pay is freed to be spent on retail or services such as fast food or movies — or anything else,” says Schussler.
“Also, disposable salaries have increased nearly 9% on average in December above December 2013. This is about 3,5% more than inflation,” he says.
In short, says Schussler, the South African consumer will be better off this year. But what does that mean for retailers? Can they, too, expect a windfall?
“I see retail sales up by 4%-plus after inflation, for a few months at least. If oil stays low the consumer will be able to have a party without guilt, but some could hold back, as the petrol price is volatile,” says Schussler.
“If oil stays below $60/bbl, more and more spending will take place on the retail side. Price drops on flights and farm products will also help,” he says.
However, he warns that though people will spend their money, it will not only be on retail. Some will be paying off debts, others might fly off to see other places.
Nxedlana equally expects retail sales to improve from last year. “Retailers across the broad will benefit. The problem is whether this is sustainable. I don’t think it is, beyond 12 months,” he says, referring to the decline in the oil price.
He says since oil is a volatile commodity, it is hard to bank on its price.
Further, says Nxedlana, a study FNB did late last year showed that lower-income
Food retailers, traditionally known a defensive stock, are in a bit of quandary. For them, slowing inflation is a double-edged sword
earners were more exposed to debt than middle to high-income earners. That means retailers selling to the middle and upper classes stand a better chance.
Analysts polled by I-Net BFA seem to agree with Nxedlana’s assessment. Among the top listed retailers, Woolworths is the only share they recommend as a buy. The rest are holds.
However, Nxedlana warns that even though the study shows middle and high-income earners have discretionary income, they are not eager to make a big commitment due to the continued volatility of SA’s economy.
“We are still in a volatile situation,” he says. “On a look-through basis, you can’t bank on the long-term sustainability of this. Consumers should remain prudent.”
Though there haven’t been extensive job losses in the mining and manufacturing sectors, employment remains weak. In past years, it’s been boosted by government’s Expanded Public Works Programme.
The private sector is still not hiring owing to the subdued rebound.
Nxedlana says this is a strange phenomenon. During a recession companies come under pressure, but in an upturn they improve. However, this is not happening in SA — the rebound has been weak.
Retailers are equally circumspect about their prospects. The standard message from CEOs as they report on their festive trading and give guidance for the year is that they are “cautiously optimistic”.
Food retailers, traditionally a defensive stock, are in a bit of a quandary. For them, slowing inflation is a double-edged sword. It could dampen their sales growth in the absence of a positive reaction in sales volume. However, the impact of the fuel price declines cannot be underestimated.
Fuel costs range from 0,5% to 0,8% of food retailers’ annual sales. A 10% decline in fuel costs could boost earnings before interest and tax by 1%-2%.
General merchandise traders such as Massmart and durable goods merchants such as Lewis and the JD Group should also benefit from the reduction of fuel costs. However, furniture remains a tough sell. Sales updates recently released by Lewis paint a grim picture in the short term, but they do indicate things may improve during the course of the year.
The group’s revenue for the nine months to December 31 grew by 4% and merchandise sales by 3%. That was an improvement on revenue growth of 1,6% and a merchandise sales decline of 3,5% reported for the six months to September.
Lewis says the improved trading was driven by higher levels of promotional activity and the contribution from the newly acquired Beares stores. Owing to the increased promotional activity to stimulate sales in response to the ongoing stock clearances at Ellerines, the group’s gross profit is slightly below last year’s level.
It is only the clothing retailers that seem to have better prospects, though they are also coming under pressure from multinationals entering the market.
Durban-based Mr Price has become an all-seasons operator with its cash sales model. While its credit-orientated peers had to battle it on price in past festive seasons, Mr Price had a fairly good Christmas as consumers generally switch to cash when the going gets tough.
Truworths, historically a trendsetter in the local fashion industry, seems to have come under pressure recently. As a result, The Foschini Group has become the flavour of the month, bolstered by its purchase of the UK’s Phase Eight fashion chain.
Analysts are hoping that the repo rate will remain unchanged for the remainder of this year, as there’s limited scope for a bullish rand trajectory.
“The lower oil price both in dollars and rands will keep inflation within the SA Reserve Bank target range of 3%-6%,” says Asief Mohamed, chief investment officer at Aeon Investment Management.
That may give credit retailers more scope to sell on credit.
All of that would be good news, but SA also faces another crisis. The planned load shedding will not only not disrupt companies’ sales, it will also result in reduced production in several companies, which will in turn reduce salaries and therefore disposable income.
Operating generators while the electricity is off has proved to be costly for many companies.
Thus while 2015 portends great prospects for the recovery of consumers, several uncertain events could thwart those prospects.
During recession, companies come under pressure, but on the upturn they improve… this is not happening in SA – the rebound has been weak