Most retailers spend the year on the rack
And tough times are set to carry on into 2017
RETAILERS contending for consumers’ pockets have been battered and bruised, some more than others, in the battle for sales this year.
In recent weeks, as many reported disappointing results, CEOs of retail companies have made it clear that they expect the environment to remain constrained throughout next year.
Stomaching that reality is proving difficult for investors, who are shopping elsewhere for returns. The JSE general retailers index has dropped 18.94% this year.
Discretionary retailers, which rely heavily on credit sales, were the first to be hit.
“Retailers of durable or discretionary goods have definitely been the losers,” said Jason Muscat, a senior FNB industry analyst.
“These are typically highervalue items that are often purchased on credit — and with rising interest rates, consumers have steered away from these goods.”
Consumers have very little room to manoeuvre.
The measure of household debt to disposable income stood at 75.1%, and “while there has been deleveraging since the 86.3% high of June 2008, elevated inflation necessitated higher interest rates, which pushed up the debt-service cost, leaving many consumers with less disposable income”, said Muscat.
Edcon, which owns clothing brands Edgars, Jet and Legit and was once the darling of South African retail, has in recent years suffered as a result of poor credit sales, as well as its own high debt and being offtarget with its merchandise.
The company has recently been bought by a consortium to THINLY SPREAD: The opening of new shopping centres, such as Mall of Africa in Midrand, Gauteng, has simply redistributed the same consumer rand among more outlets shore up its liquidity position.
Another credit retailer, furniture group Lewis, recently reported that store merchandise sales declined 9.2% and revenue for the six months to the end of September fell 2%, to R2.7-billion.
The National Credit Act and more recent changes to regulations require rigorous screening by banks and retailers when extending credit to consumers.
The entry of international retailers has also taken the shine off local players, as consumers look to aspirational brands.
Clothing and homeware retailer Mr Price Group suffered a notable blow, reporting its first drop in profit in 15 years this week. The group’s share price shed 30.43% in the past year. In the 26 weeks to end-September, Mr Price’s revenue grew by a marginal 1.5% to R9.2-billion on the back of retail sales that increased just 0.4% to R8.6-billion.
“Somewhere between these two, domestic fashion retailers have had to compete with international brands such as Zara and H&M, which, together with tighter lending criteria, has really hurt volume growth,” said Muscat.
But there are exceptions, with TFG reporting turnover growth of 16.9% to R11.4-billion.
This week, retail trade data beat market expectations, rising 1.4% year on year in September after no growth in the previous month.
Muscat said retail trade sales had been slowing progressively since 2011, driven by constrained household balance sheets and the extension of credit regulations on banks and retailers.
Yet hardware retailers have performed well, “which we think is a function of negative real house price growth, which has meant that people are staying in their houses for longer and thus are spending greater amounts on maintenance and repair”, said Muscat.
In interim results to June 2016, Massmart, which owns Builders Warehouse and Builders Express, reported an 8.7% increase in sales to R42.3-billion, while headline earnings per share after tax were up 19% to R320.6-million.
The grocery segment was also a clear winner as customers kept coming back for discounted offers.
Despite inflationary pressures, grocery retailers were locked in a price war, with Shoprite pulling ahead. Its internal store inflation averaged just 3.5% for the year, well below South Africa’s official rate of food inflation, according to Stats SA, of 6.1%.
In a trading update released last week, Woolworths food sales had increased by 9.1%.
For the rest, even opening new stores isn’t helping.
Keillen Ndlovu, head of listed property funds at Stanlib, said foot-count in shopping malls had been flat over the past few years due to the increased number of malls and the slowing economic environment.
The opening of new malls has not meant more people spending more money.
Instead, consumers have shifted to new shopping centres, leaving some older centres struggling.
Ndlovu said malls had once tended to be anchored by Woolworths, Checkers, Edgars and Game, but recently, newly listed Dis-Chem and international brands H&M and Cotton On had become preferred anchor tenants, meaning that traditional anchor stores are no longer first in line for the best spots.
The next three months will be crucial.
“At the moment, retail sales are being kept afloat by an appetite for food and groceries, especially as the rand holds its own on the global stage, but the months to come will test if the South African consumer can shell out on luxuries,” said Paul Sirani, chief market analyst at Xtrade.
He said there were many winners and losers that had been affected by the slowdown in South Africa’s retail sector.
“From producers to suppliers, logistics, marketing and beyond — it’s not just the stores themselves but ultimately it comes down to competition and it’s up to other retailers to seize upon a gap in the market,” said Sirani.
“The coming months and years may present a ripe opportunity for consumers, with retailers increasingly forced to offer discounted cash deals to shift their goods.
“There’s a long road ahead with plenty of obstacles in the way for retailers, the biggest of which is overcoming the new regulations, but companies must innovate to hop, skip and jump around them,” said Sirani.