The day retailers wage a bitter war for the consumer's last rand
To get a feel for what to expect for the South African retail industry in total over the festive season, I have aggregated the retail turnover, cost of the turnover, gross retail profit and inventories of the big 11 retailers: Shoprite, Massmart, Foschini, Pepkor, Pick n Pay, Woolworths, Truworths, Clicks, Dis-Chem, Spar and Mr Price.
The total turnover of the 11 big retailers amounted to more than R714 billion over the past year. In aggregate, they have a gross profit margin of about 25 percent and carry more than R86bn in inventories.
Yes, you can argue that some of the retailers have diversified abroad, but countries such as Australia and the UK, in which our listed retailers operate, are also going through tough times - not too dissimilar to South Africa at this stage.
The major factors that are going to determine the extent of the Black Friday and Cyber Monday offers and by whom, will undeniably be determined by which of the retailers find themselves in an overstock position and which ones are in financial distress and hence forced to liquidate stocks to improve their financials.
Which retailers are overstocked? The methodology that I used entails the split of the individual companies’ results at the interim and final stages of their financial years into those where the festive season is included and those where the festive season is excluded.
You therefore have a non-festive season six months and a festive season six months. Some will argue that it is a very crude way to analyse the industry, but some very interesting results came up.
The aggregate retail turnover of the 11 retailers in the financial results of the periods, including the festive season (December), averaged 53.3percent of annual turnover over the past five years, while the average inventories carried in the periods including the festive season were 8percent above the annual average of both periods where the festive season and the non-festive season were included.
A very important metric is the Inventory-to-Sales Ratio (ISR). The average aggregate ISR of the top 11 retailers in the reporting periods excluding the festive season (December) was 0.24 since 2017, with a standard deviation of 0.005. In the current period, the ISR is 0.246, which means that the retail market is slightly overstocked by R2bn or 2.5 percent, given a turnover of R350bn over the past non-festive six-month financial results of the 11 retailers.
With the same methodology applied to the individual retailers, Shoprite and Mr Price are both heavily overstocked by 13percent, while Pick n Pay is understocked by 6.4 percent and Dis-Chem by 2.6 percent.
Clicks, Woolworths and Spar are overstocked by between 3 percent and 4 percent. What is important, though, is that the six predominantly food and specifically the health and beauty retailers (Clicks and Dis-Chem) are less dependent on festive season sales than the other five retailers as their six-month results covering a festive season comprise around 52 percent of the companies’ total annual sales.
Truworths’ stocks are in line with sales compared to recent history, but this is highly dependent on sales during the festive season.
Foschini, the other clothing retailer, is slightly understocked but is less dependent on the festive season than Truworths. Pepkor is slightly overstocked but less dependent on the festive season than Foschini.
Mr Price is virtually non-reliant on debt, but the company's latest results have shown what excess inventories can do to a company's bottom line when it attempts to slash inventories.
The company also relies heavily on the festive season and could be quite aggressive in their efforts to reduce stocks.
The jury is out on how Shoprite will tackle its overstocked stock position. The company is as reliant as its competitors on the festive season, but the company’s increased borrowings may result in a very aggressive marketing campaign over the festive season.
Massmart is also slightly understocked and as dependent as Foschini on the festive season. Massmart covers virtually all the retail sectors through its well-known stores such as Makro, Builders, Game and Dionwired.
Weak financial management has led to the company finding itself in a very precarious situation and in urgent need to free up capital. The company will need to slash its overall Inventory-to-Sales Ratio to try to trade out of the situation.
With the retailers competing for the consumer's last dollar, you can expect that they will not take fire-sales – yes, extended Black Fridays and Cyber Mondays – lying down. The banks and loan sharks are likely to have a field time as the boon for consumers is likely to be financed by increased indebtedness.
With austerity measures such as an increase in VAT looming as the government has run out of money, you'd better take advantage of the bargains in coming days, specifically in white goods and electronics, for replacement of old ones only.
Employment is likely to shrink further, so consumers should be highly disciplined and exercise caution when lured to the shops or to buy online.
Pick n Pay and Dis-Chem have not cut their inventory-to-sales numbers for nothing. They sense hard times ahead. Black Friday and Cyber Monday buyer beware!
Ryk de Klerk is an analyst at large. Contact [email protected] His views expressed above are his own. He has no direct exposure to the companies mentioned. You should consult your broker and/or investment adviser for advice.