Mr Price was one of the retailers analysed by EY recently.Photo: Supplied

JOHANNESBURG - An analysis by EY last week showed that South Africa’s largest retailers were on a firm footing in the first half of the year, with retail profits up 4.9percent in absolute terms compared to a 2.9percent contraction recorded in the last six months of last year.

Derek Engelbrecht, EY’s consumer products and retail leader for Africa, on Friday said that a turnaround in profit growth in the first half was supported by specialty retailers while fashion and DIY and home-ware felt the impact of a fragile consumer. “While the sector is improving after a particularly tough 2016, there are still some metrics that remain concerning. Most notably, return on equity (ROE) is still under pressure, and that is particularly the case for fashion retailers.”

“On the other hand, specialty retailers continue to drive higher ROEs, and we attribute this to their niche market and ability to quickly respond to shifting customer expectations,” Engelbrecht said. Some of the companies analysed by EY are Pick * Pay, Shoprite, Dis-Chem, Spar, Woolworths and Massmart. EY found that the improving profit growth is in line with stronger retail sales, particularly in the second quarter of the year.

Earlier this month, Statistics South Africa said that retail sales in August registered its biggest gain since August 2012, with the sector set to make a healthy contribution to the third quarter’s gross domestic product after sales surged 5.5percent on a yearly basis in the period. Retail trade sales have registered year-on-year gains for the past five months.

A Woolworths outlet in Cape Town, also scrutinised by EY.Photo: Reuters

While sales in the sector have been resurgent in the past few months, the industry continues to be under the yoke of hard-pressed consumers who have curtailed their spending.

Retail giant Woolworths has seen its share price tank 21.26percent in the past six months, while rivals have dropped a marginal 1.1percent in the same period. The Foschini Group has seen its share price nosedive 16.44percent in the past six months, while Mr Price has strengthened 11.22percent and Massmart has dropped 15.68percent in the same period. Dave Nemeth, a retail expert, said that a truly great retail ecosystem will be one where e-commerce, marketing, physical store and service all speak with a cohesive message and tone.

“Retail is so multi-dimensional that it has a myriad of complexities, making it exceptionally difficult for the big corporates to be pliable and adopt new initiatives, but they have to put on a brave face and start taking some risks, knowing that most will fail until they find the real nuggets,” Nemeth said.

Some of the positive retail metrics noted by EY include a growing appetite to roll out more new stores and falling product inflation - supported by a stronger currency and a turnaround in food production after the drought hit South Africa. On the negative side, EY said that some of the challenges facing the sector were declining ROE and continued margin squeeze.

Engelbrecht said that companies that drive transformation in line with evolving customer needs will fare considerably better, regardless of which retail segment they operate in.

“Risks have not changed materially since the last reporting season, but there is perhaps a nuance in emphasis. Most notably, we see more focus placed on credit than the previous season, and international expansion is back on the agenda more visibly.”