Financial Mail

Gazing northwards

Stymied by overindebt­ed consumers in their own market, SA retailers are now eyeing Europe for better returns


gged on by analysts and investors, many of whom have London or New York addresses, SA retailers are setting out their stalls with the idea of infiltrati­ng offshore markets. The story is quite simple: the domestic situation is one of a struggling consumer with high debt and no disposable income.

Geographic­al diversific­ation is the theme for SA retailers this year — into the scary developed markets of Europe. We have much in common, after all.

At the end of the “commodity super-cycle”, when Chinese factories reduced their demand for raw materials, the SA retail sector stepped in to offset some of the weakness in the local economy. Government boosted public-sector employment by close to 1m, which cushioned the economy from the worst effects of the global economic slowdown.

But last year, our fiscal shortcomin­gs were exposed. There is no money to stimulate the economy by adding to the numbers of civil servants.

It was these new public servants who underpinne­d the growth in unsecured lending, which in turn benefited retailers like fashion house Truworths.

With interest rates set on a path of tightening, especially towards the midpoint of last year as the rand weakened, it became evident that retail, especially credit retailing, was not the space to be in.

Developmen­ts in the local market have analysts calling for global expansion. Retailers are being urged to look towards Europe and other developed markets, which look more promising right now than emerging markets.

Woolworths’ purchase of struggling Australian giant David Jones last year was the biggest move in this direction. More recently, The Foschini Group acquired a UK clothing chain, Phase Eight, for R4,3bn.

Growth is no longer being sought out in our neighbouri­ng countries only.

But are Europe, Australia and even the US really a better bet than SA, the African continent and other emerging markets?

If quantitati­ve easing (QE) doesn’t boost inflation and weaken the euro, the entire European Union faces a very real threat of deflation.

Three rounds of US Federal Reserve QE, which ran from as far back as November 2008 to its end in October last year, failed to release an inflation dragon in the US.

Why would it be any different in Europe? We’ll have to wait and see.

If anything, the US$640bn that the European Central Bank is expected to pump into its economy may well benefit risky assets such as the rand.

Should it hold firm or even strengthen in a low oil price environmen­t, the domestic consumer might find conditions easing on the disposable income front.

Because of the weak and falling oil price, the SA Reserve Bank is expected to at least keep rates on hold this week. Should oil price weakness continue, maybe rates will be on hold for much longer.

Then there’s the Australian bet. It will be interestin­g to see just how quickly that economy, considered the miracle economy among its peer nations but infected by a dose of “Dutch disease”, adjusts to a life of less demand for its iron ore. Australia can’t afford to lose another industry, having watched the sun go down on its motor industry last year.

I am not convinced of the better growth credential­s of the retail space in the developed world.

It’s an older and ageing populace; there isn’t a rapidly expanding middle class in most of these economies.

Emerging markets are no doubt in a slower growth phase, but it’s not going to be a very long winter.

Rather than searching for developed climes, we need to take a deep breath. No need to make any rash decisions. Derby is the deputy editor of the

Financial Mail


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