Discount mania knocks retail sector

Cut-price bargains ‘training consumers to shop on promotion’

● Months of heavy discounting in the retail industry are adding fuel to SA’s lower-inflation environment, with the outlook for companies’ margins looking grim.

Christie Viljoen, an economist and manager at PwC, said: “Lower-than-expected inflation could very well continue in coming quarters as the very weak economy eliminates any sign of demand-pull on prices.”

Inflation slowed from 3.7% to 3.6% in October, its lowest in nine years, Stats SA said.

Viljoen said low inflation was “partly explained by heavy discounting”.

“South Africans are the second-most price-sensitive society in the world, with three out of four consumers knowing the prices of goods that they regularly buy. As a result, retailers are increasingly focusing on selling goods at discount.”

Events such as Black Friday are evidence. Some 30% of the volume of fast-moving consumer goods is now sold at a discounted price. “The increasing frequency of discount campaigns is training consumers to purchase on promotion. Ironically, this is hurting retailers’ bottom line,” he said.

In the retail sector, inflation is mostly from suppliers, fuel and electricity costs. Eskom has applied to the National Energy Regulator for a tariff increase of up to 17%.

Shoprite has curbed inflation to 3.1% in three months to September, while Pick n Pay said it had contained internal inflation to 2.2%, mostly by improving efficiency in the supply chain.

Janine Caradonna of Pick n Pay said: “We work closely with our suppliers to unlock whatever cost savings we can across procurement and distribution.”

Sanisha Packirisamy, an economist at Momentum Investments, said: “Some retailers have opted for a volume strategy [and keeping prices low] to improve footfall in the low consumer demand environment. Retailers still face high utility costs such as municipal rates and electricity and as such could face high input costs. If these retailers don’t pass on the cost increases to consumers, their margins get squeezed.”

But consumer demand is weak.

Retail trade lifted only 0.3% year on year in October after rising 0.4% in September.

Siphamandla Mkhwanazi, an economist at FNB, said: “A slowing trend in retail sales is consistent with the souring of consumer sentiment.”

Packirisamy said: “Core or underlying inflation has averaged 4.3% for the past two years in comparison to its long-term history of 5% since 2009, while services inflation has averaged 5% for the past two years relative to 5.8% for the full history since 2009.

“This suggests downside surprises in inflation were broader than just food. After excluding the effect of administered prices [water and electricity tariffs, public transport, school fees and petrol], inflation averaged 3.9% for the past two years, further signalling subdued inflation pressures in areas of the basket where monetary policy has more of an influence.”

The latest inflation data indicates that in housing and utilities, rental inflation has slowed because of a glut of properties to let, while maintenance and repairs have shown rates below 4.5% — the midpoint of the Reserve Bank’s inflation-targeting range — for the past year.

Water, sanitation and electricity prices have exerted upward pressure on housing and utilities. Increased insurance and financial services charges are also drivers of inflation, she said.

Viljoen said: “There is no demand-pull on fast-moving consumer goods at present and this is unlikely to materialise any time soon. As a result, retail inflation is very low.”

Alec Abraham, an equity analyst at Sasfin Bank, said retailers had scaled back on rents and stopped store opening programmes while closing underperforming stores.

“They’ve cut to the bone. There’s very little more they can do. It’s affecting their operations. We’re already passed the unhealthy stage. I don’t know what they are going to do next year if they don’t get any volume growth, which I don’t think they will.”

Even though low inflation supports an interest rate cut, Abraham said amid high unemployment and tighter lending conditions, “people just don’t have money”.

“It doesn’t matter how cheap something is ... it doesn’t matter how low the interest rate is. [A rate cut] would be absolutely ineffectual in terms of stimulating demand. The core issue at hand is we need growth, we need employment, we need real wage growth, and with this kind of economy we’re not going to see it.”

Azar Jammine, chief economist at Econometrix, said inflation was expected to rise above the midpoint of the Reserve Bank’s target in two months because of statistical factors. “A year ago, the price of fuel declined by more than R3 a litre. So you’re going to have a sudden dramatic increase in the year-on-year fuel inflation rate in the next two prints for inflation and that’s going to cause inflation to rise back over 4.5%.”

He said of the Reserve Bank: “Why should they lower inflation rates when those elements … remain very high?”