Retail sales growth slows in first quarter

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Household expenditure is being crimped by rising costs‚ a moderation in income growth and job scarcity in South Africa‚ where consumers are battling to pay loans and store accounts. Results from most South African retailers already indicate a slowdown.

The latest EY/BER retail survey suggests that volume growth slowed significantly during February and March.

Derek Engelbrecht‚ retail and consumer products sector leader at EY‚ said the deceleration in retail sales growth during the first quarter was broad-based‚ with retailers in non-durable goods - such as food‚ groceries and cosmetics - and semi-durable goods including clothing‚ CDs and toys now joining long-ailing furniture and household appliances retailers in reporting weak sales growth.

Slowdown in unsecured credit

"Wounded by a substantial slowdown in unsecured credit extension‚ coupled with waning real disposable income growth and a sharp decline in consumer confidence levels‚ furniture and household appliances sales volumes contracted 4.8% during 2013‚" he said.

"The results from the survey suggest that the miserable run for furniture and household appliances retailers continued during the first quarter‚ although the rate of decline may be easing."

The 50-basis-point hike in the interest rate in January dealt another blow to this credit-sensitive sector‚ while hefty price hikes on the back of a weak rand are now also starting to weigh on imported electronic goods sales volumes.

Durable goods retailers‚ or those that sell furniture‚ household appliances and hardware‚ were not alone in reporting a significant uptick in their selling prices during the first quarter.

Purchase, selling price indices

The BER's indices measuring overall purchasing price (that is‚ input costs) and selling price increases in the retail sector rose substantially to reach five-year highs during the first quarter‚ with retailers across all subcategories reporting considerable cost pressures and notable hikes in their selling prices.

"The increase in the BER's index for retail selling prices corresponds with the marked acceleration in the CPI inflation rate‚ from 5.4% in the final quarter of last year to 5.9% in February‚ and points to further upward pressure on inflation in coming months‚" Engelbrecht said.

Consumer goods wholesalers and manufacturers that participate in the BER's business surveys also reported higher than anticipated hikes in their selling prices during the first quarter‚ suggesting pervasive price pressure throughout the retail supply chain.

Trading at about R10.80/$‚ the rand has depreciated 40% over the past two years‚ putting substantial upward pressure on the cost of imported goods such as household appliances‚ electronic goods‚ sporting equipment‚ toys‚ CDs‚ and clothing and footwear‚ as well as the petrol price and transport costs.

Price increases ahead

So far‚ subdued domestic demand and low global inflation have helped limit the pass-through of these cost pressures to retail selling prices.

However‚ the results from the survey now clearly point to more significant increases in retail prices.

At this stage‚ it is not clear whether this will turn out to be a one-off increase in the price level or the start of accelerating price increases.

Contrary to history‚ rand depreciation and higher selling price increases noted in the BER's retail survey have since the 2008-2009 recession not yet led to substantial increases in measured inflation.

Whereas furniture and household appliances sales volumes had already been in the doldrums last year‚ hardware‚ paint and glass retailers and semi-durable goods retailers recorded strong volume growth last year.

"Bolstered by a gradual recovery in the building and construction sector‚ hardware retailers continued to report robust sales growth during the first quarter.

"However‚ the majority of semi-durable goods retailers surveyed by the BER reported a deceleration in sales growth in recent months‚" Engelbrecht said.

Contributors to growth

Hardware‚ paint and glass retailers‚ and retailers in textiles‚ clothing and footwear were the mainstay of sales growth in the retail sector during 2013‚ with robust volume growth measuring 6.9% on average.

Excluding these two retail sales categories‚ the growth in retail sales slumped to a mere 1.1% during last year.

Given subdued retail sales growth‚ coupled with relentless downward pressure on profitability levels‚ it is not surprising that the confidence levels of retailers remained low during the first quarter.

Only 39% of respondents to the EY/BER survey reported that they were satisfied with prevailing business conditions in the retail sector‚ down from 40% in the fourth quarter of last year and 49% in the third quarter of last year.

The majority of retailers surveyed by the BER expected a further deterioration in sales growth during the second quarter.

"Given low consumer confidence levels‚ rising inflation‚ a slowdown in household credit extension‚ lost income due to strikes and the poor job creation prospects for the South African economy in the near term‚ retail trading conditions are set to remain very challenging in coming months‚" Engelbrecht said.