Darkest hour behind us?

The 0,5% drop in interest rates in early December and the declining petrol price were a boost to morale, but in practical terms they seem generally to have been too little, too late.

A rough poll of mainstream retailers indicated highly cautious shopping behaviour during the holiday season. This will put more pressure on the margins of retailers, which had already suffered declining sales. Price becomes a more important competitive factor, even for those retailers that are weathering the storm relatively well. Lower prices in turn hurt the bottom line.

“As expected, the inflationary environment is spurring customers to spend more cautiously,” says Woolworths. Customers are also favouring more affordable products. Anticipating this focus on value, Woolworths has pared prices considerably in core categories. Basic lines are now extremely competitively priced. This strategy has been supported by regular promotions.

Pick n Pay group finance director, Dennis Cope presents a slightly different view. “Pick n Pay prepared for good sales over the festive season and was not disappointed, as customers showed amazing resilience, even under difficult economic conditions.” The sales figures have exceeded forecasts, says Cope.

Efficient Group economist Fanie Joubert says the group expected the retail sector to come under pressure this festive season. “Consumers are under a lot of strain,” he says. But Joubert points to a puzzle that still needs to be unlocked. Many people did not go on holiday, so did they spend some of the money saved with retailers?

In its latest retail trade report, the Efficient Group captured a decline of 2,3% in retail sales in the month of September, compared with the same month in 2007. Retail sales declined by 2,2% in the first 10 months of last year. October marked the sixth consecutive year-on-year contraction.

“We expect a decline of 2% - 3% for the December period against December 2007,” says Joubert. Efficient Group's latest report showed household furniture, appliances, jewellery and sports goods suffering the most last year.

In its results for the year ended August, furniture retailer JD Group reported that “the difficult trading conditions have severely affected sales in our traditional retail division, and have resulted in product margin erosion”.

But December trading was in line with expectations, says JD Group executive chairman David Sussman. “Christmas was a lot later this year. We saw a lot of last-minute trading,” says Sussman. “We maintain that despite the current difficult trading conditions, the long-term outlook remains positive.”

The big question is when the consumer demand cycle will turn.

The past December may have represented the trough of a difficult cycle for the retail sector — a case of the darkest hour coming before dawn.

The interest rate cycle seems to have turned with the SA Reserve Bank's cut in December last year. The petrol price has been in dramatic decline — though tensions in the Middle East could change that — while general inflation seems to have peaked. And workers will still push for higher wage increases, according to Joubert. All this is set to increase consumers' buying power, he says: “We expect to see a pickup, albeit from a low base, towards the middle of this year.”

Retailers are generally looking ahead with confidence. Though trade is likely to remain tough in the coming year, Woolworths claims to be well-placed for future growth, when a less-pressured consumer turns to innovation and quality rather than being guided purely by price.

Though we should expect some fallout from the economic slowdown in developed markets, says Cope, the drop in the fuel price, the relative stability of the rand and expected interest rate decreases are all big positives. “Pick n Pay is expecting solid growth during 2009.”

So by December this year, soothing jingle bells could be back for the retail sector, which contributes about 14% to GDP — and Christmas will come twice in 2010, due to the hosting of the soccer World Cup in the middle of winter.

Source: Financial Mail

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