SA facing widespread retail gloom as consumers cut back
For ages various economic commentators have been warning that South African consumer spending is going to come under pressure, and it seems like this is happening at last, according to Ernst & Young. There's been every reason to anticipate weakness in consumer spending and, by association, in retail sales. Interest rates have started to rise and banks have started to tighten lending standards in response. The rand has weakened a lot, pushing up the price of imported goods. Concerns about equitable practices and consumer stress have meant a drop off in unsecured lending, and wage growth has been relatively modest. With unemployment as high as ever, and with anxieties about the next few years increasing, it's really no surprise that we're seeing virtually ubiquitous weakness in retail sales. There are, of course, some retailers that will handle this better than others – especially value brands like Famous Brands or Massmart – but we can anticipate broad weakness in the sector for the next year or two. – FD
GUGULETHU MFUPHI: The latest Ernst & Young and Bureau for Economic Research retail survey suggest that the growth in retail sales volumes resumed its downward trend during the first quarter of 2014. That is despite the growth in retail sales volumes that had accelerated during the festive season in the fourth quarter of last year. Joining us now for more is Derek Engelbrecht, Retail and Consumer Products Sector Leader from Ernst & Young – E & Y. Which is the correct one?
DEREK ENGELBRECHT: EY.
GUGULETHU MFUPHI: EY – there we go.
ALEC HOGG: What happened there?
DEREK ENGELBRECHT: Global rebranding Alec. It's a simple catchy way I guess, just to present a value proposition…building a better working world.
ALEC HOGG: What about Mr Ernst and Mr Young's family and descendants, aren't they feeling a little irritated? I often wonder about things like that: rebrandings that are imposed on you.
DEREK ENGELBRECHT: They do catch on with the market. There is a bit of legacy, but we're quite proud of that – 160 years on the continent – so I guess there is value in having both the old and the new refreshing one another.
GUGULETHU MFUPHI: That's why there's Alec and myself. I'll leave it at that. Nonetheless, coming back to the research that has been compiled by EY, it does seem as though the retail sector is losing steam, judging by your report for the first quarter of this year.
DEREK ENGELBRECHT: I think one of the more interesting observations is that it's been a while since we've seen this broad-based decline in volume growth affecting all parts of the retail sector. In previous years, we've had certain parts of the retail economy, so to speak, fire on different cylinders. It's the first time in a while that we've seen a general gloomy mood on all of those sectors, all reported at the same time by their respondents.
ALEC HOGG: What's causing it?
DEREK ENGELBRECHT: I think there are a number of factors, which are impacting in particular. The durable goods sector: they've been under the cosh for a while, but I think the basis point interest rate hike in January in particular, has obviously made that interest rate-sensitive part of the economy even gloomier than it was. I also think that if one thinks about disposable income growth, that's just not there. Some of the unsecured credit extension that has been…the tap's been turned off in the last two or three quarters, and I think just generally speaking, consumer confidence levels being at historic lows tend to place a dampening mood on all of those sectors all at once.
GUGULETHU MFUPHI: Isn't there a particular sector that is best positioned to handle all of these pressures?
DEREK ENGELBRECHT: There are certain players within some of those sectors, which I think have responded better to some of these challenges. I overheard your segment with regard to Famous Brands and Wakaberry, which was the previous segment, and it's a typical value play. As people migrate from the Haagen–Dazs, which is the full premium-priced ice-cream experience, to the frozen yoghurt…it's ideally placed to pick up people as they continue to be ever so conscious about what their money buys from a value proposition perspective.
ALEC HOGG: It's quite interesting, Derek. The picture you painted for us is obviously not an exactly bright one, yet we have two surveys from Stats South Africa about employment. The one survey, which Jacob Zuma likes to refer to, is that we created five-hundred-and-seven-thousand jobs. In other words, employment went up five percent last year. The other survey, which Azar Jammine is pointing out, was that we created thirty-nine-thousand jobs – a massive chasm between the two. Where would you vote, or which one of the two in your opinion, is accurate?
DEREK ENGELBRECHT: If I look at the people we interact with in the market by and large, I have not seen a significant increase in levels of employment that would seem to rationalise or justify a five percent increase in employment. I think where businesses are losing people through attrition they end up thinking very hard about replacing like-for-like, and I also think they are thinking very hard how they could lift the level of productivity of the remaining workforce to cover for that natural attrition in the short term. There is no doubt that everybody wants to employ more people in a growth story, but unless more companies get reliable data points that confirm the growth trajectory, you'll find that 'holding back' in the short and medium term.
ALEC HOGG: Of the individual retailers, which ones are shining? Even in a down market, some gain market share over others. For instance, Massmart with the Walmart effect: is that helping?
DEREK ENGELBRECHT: I think it is. One needs to understand how the priorities of typical retailers shift around. During periods where you have significant downward pressure on profitability, companies are desperate to maintain or drive top line fees across the door, but a lot of internal looking at unlocking efficiencies in the supply chain… Can we buy smarter? Can we stretch our supply chain to fund our growth? How do we collect the cash out there earlier, so that we manage the middle part of the income statement? I think one needs to look at both the external manifestation of growth – feet through the door… What is becoming clear, is that it's becoming more costly to make a sale, so cost of sales, whether that's by virtue of promotional items or promotions, is becoming flavour of the month. That, given a consumer with low confidence, is probably the only way you're going to stimulate people to spend money. In more booming times, you have to do less encouragement, which means that for every R1.00 of sale you hold more back from a profitability perspective.