Retailers should rethink their expansion strategy of opening new stores as economic data suggested that weak consumer spending would continue to squeeze margins, David Smith, an equity analyst at Macquarie First South Securities, said on Friday.
Smith, who was addressing retail and property industry delegates at an SA Council of Shopping Centres breakfast in Durban, said the trend of cannibalisation in retailers was on the increase at a time when store chains were struggling to maintain sales ahead of costs.
Smith’s assertions were backed up by the retail trends report released by the SA Property Owners Association in March. It recorded an annual increase of 5.2 percent in trading density, or sales per square metre. In real terms this translated into a marginal decline because consumer inflation was 5.7 percent for the 12 months to March.
The report highlighted that gross rentals grew faster than sales, which meant retailers’ costs of occupancy increased.
Smith said retailers were finding it difficult to deal with rising costs such as trading space and staff salaries.
As of March, one of the biggest apparel retailers, Edcon, traded in 1 403 stores in South Africa and other countries in Africa. The retailer increased its trading space by 5.2 percent during the year.
In an aggressive expansion plan, South Africa’s biggest food retailer, Shoprite, planned to open 101 new stores in South Africa by June.
However, Smith said the 2013 financial year proved to be a tipping point for both food and apparel retailers as margins continued to be squeezed against the backdrop of highly pressured consumers.
He asked whether it made sense for retailers to grow their trading space under these circumstances.
Smith’s biggest concern was the high levels of indebtedness of South African consumers.
“One of the biggest concerns was household debt to disposable income. We have never experienced such levels of debt per person or per income,” he said.
When interest rates started rising, consumers were going to be more sensitive than ever, which would have a direct impact on retail sales.
Smith said consumers would start to feel the impact of interest rate hikes in six to nine months, “which means retailers might have to wait until 2017 for things to start looking better”, he said.
Retailers had had a good decade, with South Africa experiencing massive growth in the government sector of the economy, real growth in wages and a plausible performance from international partners.
“If property developers were building on the expectations of the last decade, they are going in the wrong direction,” he said. “In the past decade apparel [retailers], and to some extent food retailers, saw 20 percent average growth, which was phenomenal.”
But retailers needed to grow sales faster than costs or else margins would come down and they would hit zero profit.
Smith singled out retailers such as Mr Price, Woolworths and Truworths as those that had been able to control costs. He said Pick n Pay and Edcon were unable to do so because they were playing catch-up.
“The 2013 financial year was an okay year for retailers. However, we saw costs already starting to outstrip sales per square metre… before all the micro concerns that we are faced with now,” he said.
However, Patrick Flanagan, an executive director of Flanagan & Gerard, said markets were dynamic and there was a huge amount of urbanisation taking place. “All you need is to look at the growth of the population, which was at 42 million people in 2002 and has shot up to 54 million.”
Flanagan & Gerard, in partnership with other property developers, announced plans to develop two new malls: a R900 million regional shopping mall in Thohoyandou, Limpopo, and an R850m regional shopping mall in Springs. Construction is scheduled to begin soon.
Among other retail projects, Atterbury Property Developments is developing the R3.5 billion Mall of Africa in Waterfall City, Midrand. It is scheduled to open in April 2016.
Flanagan conceded that caution was appropriate given the current state of the markets. “You have to make sure that you develop to close gaps in the market.”
Flanagan added that there were lots of areas in South Africa that were prejudiced because of apartheid. “If one takes Thohoyandou for example… there is absolutely no doubt in our minds or [those] of retailers that the centre will serve the industrial guys.
“As in all things, one has to be cautious but also make sure that one applies principles for development, in the same way that retailers should make sure that they go into these developments because they are not represented in those markets.”
Flanagan said there was a huge disconnect between the formal and informal sectors, which made official statistics very conservative.
Retailers “have continued to deliver [growth in] double digits and if you strip out inflation, the store will show between 5 percent and 7 percent growth.” This meant there was an economy beyond that recognised in official statistics.”
The cash economy was one of the biggest factors driving retail sales, he added. - Business Report