Retailers on the ropes as impact of July riots manifests

By Justin Rowe-Roberts, Investment Correspondent

Our economy, already under pressure, hit another setback in July when rioting and widespread looting took parts of Gauteng and KZN ransom. The economic impact of the riots is predicted to be around R50bn, however, the long-term consequences of the riots will likely be far greater. South Africa’s unemployment rate is at 34%, with the broad definition – that includes discouraged workers – at 44%. Youth unemployment sits at a staggering 75%, meaning three out of every four people in the workforce between the ages of 15 and 24 are unemployed, which is nothing short of a catastrophe. Over 40,000 businesses were affected by the riots, small and large, many of which will cease to exist owing to the financial impact. Thousands of jobs will be lost, consumer and business confidence – specifically within those geographies but the broader country, too – will be further dented. This at a time when the economy was just on its road to recovery, following its pandemic-induced meltdown. 

Most of the businesses affected fall into the small- and medium-sized business (SMME) category. Unfortunately, as these businesses are privately owned, financial information is not in the public domain. But given the severe impact of the riots on some of South Africa’s largest businesses – Pick n Pay, Massmart and Mr Price to name a few – we can extrapolate and forecast the damage it must have caused among the entire business ecosystem. Several of these SMMEs won’t have access to further capital to continue operating. 

 

“SMMEs account for the majority of the businesses worldwide and are important contributors to job creation and global economic development.” – World Bank

 

South Africa’s National Treasury estimates the riots will have a sustained impact on the economy and shave around 1% off the gross domestic product (GDP) in 2021. 

 

“We are concerned about the potential scarring effect on employment and sentiment that may outlive the shock and impact potential growth.” – National Treasury 

The backbone of the economy, decimated. 

Taking a deeper look into the financial impact from a numbers perspective, we look at three of South Africa’s largest retailers: Pick n Pay, Massmart and Mr Price. 

Let’s start with wholesaler Massmart, best known for brands such as Makro, Game and Builders Warehouse. I’ve taken an extract of the retailer’s latest commentary on the impact of the July riots (below for ease of reference). Despite Massmart’s turnover being around R90bn, the company has a market value of only around R16bn. Long story short, Massmart’s American owners, Walmart, has not quite managed to replicate the success they’ve had at home. The group expects gross losses of R2.5bn and net losses of R650m. This equates to 15% and 4% of the company’s entire value. Who would want to do business in South Africa? Ask the executives at Walmart.   

“The group estimates that the total replacement cost for property and stock damages suffered as a result of the civil unrest to be R2.5bn of which R1.3bn relates to inventory losses. This material impact is primarily due to two Makro stores (Pietermaritzburg and Springfield) and two Distribution Centres in KZN (Riverhorse and Cato Ridge) being looted and extensively damaged. The Makro in Pietermaritzburg and the Riverhorse DC was completed destroyed by arson. The group does have SASRIA insurance cover for the fixed asset and stock losses suffered, however, as previously communicated, the SASRIA cover is not sufficient to cover the full extent of the losses. The expected net loss for the group after taking the insurance cover into account is estimated at R650m.”

The impact for discretionary retailer Mr Price was far less; however, the commentary in its latest results reflects the continued impact the civil unrest will have on the business in the foreseeable future. Some of the stores that were looted and damaged have not yet reopened while others have closed permanently.

The civil unrest throughout the province of KwaZulu-Natal and parts of Gauteng in July 2021, resulted in the looting of 111 (approximately 7%) of the group’s 1,592 stores. As a result, the group’s earnings performance as outlined above includes asset write-offs incurred for stock, cash and assets. The group continues to carry the costs of the looted stores since the looting despite not being able to trade and generate income. The associated business interruption losses continue to be assessed and the group anticipates further insurance payments to be received in H2 FY2022 and H1 FY2023.

One of South Africa’s well-known brands, food retailer Pick n Pay outlined the damage caused by the unrest in its latest financials. A common theme among all three retailers is that the insurance payout from SASRIA was not nearly enough to cover the extent of the damages, an ominous sign for SMMEs that are not well capitalised.  

 

The group estimates that the trading disruptions resulted in lost sales of approximately R1.7bn in the group’s second quarter of FY22: R930m in respect of the civil unrest and R800 million as a result of liquor restrictions. Gross profit at 18.2% of turnover also reflects the severe financial impact of the civil unrest, including material stock losses and increased costs of security across the group’s distribution channel.

 

The frightening part about looking at the data is the extent of the damage, despite such a narrow sample size. Yes, these are big retailers with large footprints and scale, however, tens of thousands of other businesses were affected. These figures merely scratch the surface of the pain the economy has felt as a result of the civil unrest. 

 

The long-term consequences will only begin to show in the coming months as more data and information on the affected jurisdictions and businesses become available and it will be hair-raising. We can only hope an event like this will be idiosyncratic as any further disruptions could throw an already hobbling economy off the edge. 

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