Retailers in a tight cornerComment on this story
Increasing demands on consumers’ discretionary income would put retailers in a tight spot this year, analysts agreed yesterday.
Factors including high indebtedness, a continued weakening of the rand and tighter criteria for unsecured loans on one hand, and spiralling food prices along with higher fuel costs on the other will force retailers into a scramble for the lower available sales volumes.
The rand gained less than a cent to R10.89 a dollar by 5pm yesterday to remain near the weakest levels since October 2008. According to the Automobile Association of SA, consumers will have to deal with potential fuel price hikes next month of between 28c and 32c a litre for petrol, 15c a litre for diesel, and 9c for paraffin.
Analysts also warned that even though retailers could afford to absorb cost hikes, some would be passed onto consumers.
Theresa Heath, an analyst at Stanlib Asset Management, said consumer weakness would make for a tough season.
“Consumers are at a high level of debt and the personal loan boom has come to an end. Consumers will now have to digest this debt especially because repayment terms have now been extended,” she said.
Heath said high levels of debt would mainly affect low- and middle-income consumers. “We still think that the high-end consumers are in a better place,” she added.
Commenting on the latest retails sales data released by Statistics SA this week, Kamilla Kaplan, an economist at Investec, said the slowing down of credit extension would temper the pace of growth in retail sales.
“This consideration, coupled with the possibility of an increase in prices, at a time when households are experiencing financial strain, suggests that the consumers’ capacity for a meaningful increase in spending will diminish,” Kaplan said.
Retail sales at constant prices grew 4.2 percent year on year in November last year, up from 1.4 percent in October.
Kaplan said both producers and retailers were experiencing persistently higher operational costs, which they would probably attempt to absorb indefinitely. “Passing higher costs on to consumers, when demand is weakening, will likely encourage consumers to purchase cheaper goods,” she said.
Woolworths said this week that clothing sales grew 10.7 percent in the six months to December, with food sales rising by 15.3 percent.
Regarding sales at the up-market retailer, Heath said: “It is clear from Woolworths’s numbers that the high-end consumers are holding up okay.”
Retailers are also likely to experience high levels of inflation specifically in imported goods. Mr Price imports much of its garment stock and internal inflation is over 10 percent.
“I think across the board for clothing retailers inflation will be an issue,” Heath added.
“Food inflation is under control at the moment and certainly very competitive.”
For the quarter to December, Mr Price’s total sales grew 14.8 percent with the group’s apparel division recording 17.2 percent sales growth, it said yesterday.
Clothing rival Truworths said in a trading update yesterday that retail sales grew 7.1 percent to R5.9 billion for the six months to December, less than half the 14.8 percent pace recorded a year earlier.
Mr Price’s latest trading update was of concern and reflected a downward trend in consumer spending, Absa Investment retail analyst Chris Gilmour said.
“If Mr Price is exhibiting a slowdown, it tells us that things are about to get even tougher.
“The general consumer confidence trend, which is still downward, will continue for the rest of the year. Consumers are still battling with debt; the weaker rand will also have an effect,” Gilmour said.
Gilmour added that margins at the local retailing companies would also be under pressure particularly in imported products as well as local manufactured goods.
“Retailers will need to keep their eyes firmly on costs and price points because that is all they can do,” he concluded.