Retailers are facing a subdued festive shopping season

A slowing economy and high interest rates and inflation coupled with high indebtedness are expected to see South Africans cut back on holiday spending during the festive season.

Retailing profits will be affected adversely as consumers battle to manage on low disposable incomes that have been eroded by inflation.

Retailers at the upper end of the market selling luxury products are likely to be hit worse than those operating in the lower end of the market.

Retailers preparing for the festive season would do well to look at the South African Reserve Bank's latest Quarterly Bulletin, which shows that growth in consumer spending, the economy's main engine, slowed sharply in the second quarter, evidence that interest rate hikes are beginning to bite.

The Reserve Bank raised the repo rate by five percentage points to 12% between June 2006 and this June, gradually curbing economic growth.

Growth in spending on semidurable goods slowed to 2.4% from 10.5%, adding to the evidence of the pain retailers are feeling. The retail sector, the economy's third-biggest sector, saw its sales fall 2.2% in the second quarter.

Household debt decreased to 76.7% of disposable income from a record 78.2% in the first quarter, after clocking up successive peaks over the past few years. But debt costs still edged up to 11.6% of disposable income from 11.3% — levels last seen in 1999.

Consumer spending grew a mere 1.2% in the second quarter after growing 3.3% in the first quarter, extending a slowdown that began early last year.

Growth in disposable income slowed to 2% in the second quarter from 2.6% in the first quarter — far below the peak of 9% in the last quarter of 2006. Analysts say this shows pay increases are not keeping up with inflation, and should back the case for the Bank to hold interest rates steady for the rest of this year.

Absa Asset Management Private Clients analyst Christopher Gilmour says as people get thriftier because of high interest rates, fuel and food prices, they naturally look for value, and “Mr Price offers it”.

“Christmas trading should be reasonable, but probably down from last year's growth,” Gilmour says.

“Looking at furniture group Lewis, which has big-ticket items like furniture and appliances, if we assume there's no relief on the interest-rate front until next year at the earliest then Lewis cannot expect to do much more than mark time,” he says.

Christmas is unlikely to bring much cheer to Lewis or any other credit retailer for that matter, Gilmour says. Mr Price should benefit from down-trading by customers who still want fashion clothing and home ware, but at a discount price.

Pick n Pay's extensive restructuring continues, and it is unlikely that Christmas trading will produce any fireworks. But at least earnings growth will be positive and probably in the low double digits, says Gilmour.

Analysts say Woolworths has also experienced something of a shake-up. Its food operations may do quite well, aided by extensive promotions and discounting. On clothing, the jury is still out on whether the new Country Road collection will generate enough excitement in the women's range.

Woolworths says it has undertaken a pragmatic review of customers' favourite products. “These products are now offered to customers at an even better value price with the same eating experience,” it says.

Shoprite should have a good Christmas, says Gilmour. Locally, Shoprite is gaining market share, and elsewhere in Africa it is “pumping”. Of all the retailers, it should show the best growth over this period.

Clicks MD Mike Harvey says his group is proving to be a resilient business as more than 70% of turnover is in the defensive merchandise categories of health and beauty, which are less cyclical than clothing and other discretionary goods.

Source: Business Day

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