How South Africans are dealing with inflation

A shopper deciding what to buy.Pictures: Oupa Mokoena

A shopper deciding what to buy.Pictures: Oupa Mokoena

Published Jan 19, 2017

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Johannesburg - South African shoppers with limited spending money are

turning to low-cost supermarket chains such as Shoprite Holdings for cheaper

food and eschewing new clothes to counter accelerating inflation.

Africa’s biggest food retailer on Tuesday reported 7.4 percent half-year

sales growth at South African stores that have been open for more than a year,

equal to how much the company raised prices in the period. That outperformed

like-for-like food growth at higher-end department store chain Woolworths

Holdings Ltd. as shoppers shunned more expensive foodstuff in favor of cheaper

options. For those selling fridges, furniture and clothes, it’s an even bleaker

picture.

“It’s a confidence issue,” Damon Buss, an equity analyst at Electus Fund

Managers in Cape Town, said by phone. “Consumers are not spending as easily,

they are holding back.”

South African shoppers have been hurt by an inflation rate that climbed to

a 10-month high of 6.8 percent in December, led by surging food costs following

the worst drought since at least 1904. That’s been compounded by

unemployment of 27 percent and economic growth in 2016 that was the slowest in

seven years. Interest rates at their highest level since March 2010 and tax

increases have also weighed on disposable income.

With the first of the retailers due to release detailed earnings next

month, Buss expects sales growth to have been supported by aggressive

promotional deals. This probably means that profit margins are under pressure,

he said. Mr Price Group, a South African clothing and homeware retailer, cited

“high levels of price discounting” and tougher competition when reporting a

quarterly revenue decline on Tuesday that sent the share price tumbling the

most in two months.

Read also:  Economists urge caution on interest rates

There are some positive signs. November retail sales jumped 3.8

percent compared with economist estimates of a contraction, while clothing

retailer The Foschini Group may be seeing a pick-up after saying on Monday

that trading over the festive period had been better than the company expected.

The FTSE/JSE Africa General Retailers Index, which fell 11 percent in 2016, has

climbed 7.4 percent in the past week.

Any recovery for the industry will depend on how quickly food inflation

starts to slow and how soon that is passed on to consumers, SBG Securities

equity analyst Kaeleen Brown said by phone from Cape Town. Heavy rainfall in

the past two weeks eased the effect of last year’s drought, with the Vaal Dam,

which supplies water to Johannesburg and surrounding areas, reaching its

highest level in 15 months.

“Food-price inflation should start dropping significantly, but possibly

only in the second half of this year,” Buss said. “It takes a while for the

relief felt by the farmers to come through to the food producers and only then

is passed on to the retailers.”

BLOOMBERG

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