SA retail sector continuing recovery

Market fundamentals have improved markedly over the past 12 months since early 2010, and despite lingering structural weaknesses in consumer spending, confidence and credit growth caused by high unemployment and the low level of consumer savings, Fitch expects retail and wholesale sales growth to accelerate from mid-2011 onwards.

Fitch believes that the South African economy had moved into a sustainable growth position by end-2010, boosted by strong quarterly GDP growth of 4.4% recorded in Q410, and that demand conditions will further improve in 2011, albeit from a low base.

The conservative credit profiles of Fitch-rated South-African retailers support a stable outlook for the retail sector over the next 12 to 18 months.

However, risks to retail growth over the medium term include possible interest rate increases, weak consumer confidence levels and persisting indebtedness, rising inflation and increased levels of competition from both local and international players.

Wal-Mart/Massmart merger

Wal-Mart Stores Inc ('AA'/Stable) in late 2010 made a cash offer for 51% of South African discount retailer Massmart Holdings Limited (Massmart), although final approvals remain outstanding, which will further increase pressure on retailers across the sector.

"Improving aggregate retail sales growth is expected from mid-2011 onwards, supported by strong South African GDP growth and a continuing low interest rate environment."

"However, the pace of improvement in retailers' operating margins is expected to be gradual, as above-inflation wage cost increases and high levels of competition continue to plague the industry," says Roelof Steenekamp, Director in Fitch's South African corporate team.

"Despite the January 2011 growth figure being slightly below market expectations, medium-term fundamentals remain healthy."

Fitch expects food inflation to accelerate during 2011, from very low levels in 2010, which will boost food retailers' sales growth over the next 12 months to early 2012.

Benefits for big stores

Larger food companies, notably Pick and Pay Stores Ltd (Pick and Pay; 'A+(zaf)'/Stable/'F1(zaf)') and Shoprite Holdings Limited (Shoprite), are also expected to benefit from the significant geographical spread of their operations, the defensive nature of their products and extensive distribution capabilities in 2011 and 2012.

Shoprite reported 9.5% growth in turnover for the six months ended 31 December 2010, with its South African supermarkets growing strongly, by 8.4% over this period.

Pick and Pay reported turnover growth of 6% for continuing operations for the six months ended 31 August 2010 and 2.1% on a like-for-like basis.

SA retail sales

Statistics South Africa reported on 16 March 2011 that seasonally-adjusted growth in South Africa's retail sales increased slightly, by 1.5% year-on-year in January 2011, compared with a 1.6% increase in December 2010.

However, retail sales grew by 7.7% in real terms for the three months to January 2011, compared with the same period a year ago.

The main contributors to growth over this period were general retailers (up 5.7%), textiles, clothing, footwear and leather goods retailers (up 7.9%) and household furniture, appliances and equipment retailers (up 17.3%), whilst food retailers reported an increase of only 0.4%, hampered by weak demand conditions during 2010.

Retailers involved in the more discretionary, higher value, durable and semi-durable retail segments such as furniture, household goods and appliances, and hardware, have recorded higher growth compared with the overall retail market, highlighting the improvement in demand as a result of improved economic conditions and the effects of delayed spending.