Christmas wish lists are likely to be more modest this year as consumers rein in discretionary spending on clothing, homeware, appliances, jewellery and sporting goods. Moreover, as for a new BMW or lounge suite, that is out of the question for most. This does not bode well for retailers, many of whom earn up to 40% of their turnover in the busy November and December trading period.
SA shoppers are clearly finding it difficult to adjust to their altered economic circumstances. Consumers will have to work harder to curtail their growth in debt, despite credit card debt — which rocketed 37,5% in the year to September 2007 — expanding by just 5% this past year to September. In line with this, retail sales declined 2% for the first nine months of this year, pointing to a recession in the retail sector. In the same period last year, sales grew by 9%.
The figure that surprised analysts and economists was the 5% decline in spending in September, reported by Stats SA last week. That is a far cry from the heady days in September 2006 when spending grew by 13%. This decline shows the economy is faced with declining consumer demand.
However, within the sector all is not equal. Some retailers will fare better than others, says Coronation Fund Managers analyst Quinton Ivan “There are pockets within the sector where retailers are trading fantastically well.”
Value retailers such as Mr Price, Pep and Ackermans are performing well. At the upper end, retailers that have their merchandising offering correct — like Truworths and the Foschini group's Markhams — are succeeding in attracting the discerning shopper.
Ivan adds that retailers with a footprint in the rural and peri-urban areas are also trading strongly. “Companies that service the outlying areas are growing. Spar's Build it stores grew top line 29% [in the year to September] and Cashbuild reported sales up 29% for the three months of this financial year.”
Sales volumes in the outlying areas are holding up because of the social grant system and employment is still quite stable. Food inflation is also driving top line figures in these environments.
There is another important difference in today's retail landscape. In the 2001 down cycle, rapid rate hikes, the lottery, casinos and cellphones ate into disposable income and caught retailers unaware. In the current interest rate cycle, retail top-line sales have declined more gradually. “This has allowed retailers to streamline their operations and adjust their stock levels accordingly,” says Ivan. “Even if Christmas sales are slow, inventories are better managed and we're unlikely to see crazy sales and heavy mark-downs in January.”
This suggests that gross margins, vital to retail profitability, will be protected. And so retailers will survive this down cycle to trade another day.
Source: Financial Mail
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