Retailers in for less festive season

Credit: Luigi Diamanti

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Results from the latest Bureau for Economic Research (BER)/Ernst & Young Festive Season Retail Trends survey reveal that the holiday period, traditionally a boom time, is unlikely to improve the fortunes of hard hit domestic retailers.

Weakest Q4 results in 23 years

The survey showed that a net majority of 28% of the survey respondents reported lower Q4 volumes compared with the final quarter of 2008.

"This is the weakest Q4 result in the history of the survey, i.e. since 1986," said Derek Engelbrecht, Ernst & Young Retail and Consumer Products Sector leader.

However, the depressed number has to be qualified by analysing the results per retail sales category.

When this is done it is evident that most of the sales volume weakness was reported for durable goods retailers.

"Almost 70% of respondents in the durable sector reported lower sales volumes compared with 2008 Q4. This is a record low for Q4 and the third weakest reading for any quarter since 1986Q1," noted Engelbrecht.

Despite 500bps (basis points) worth of interest rate reductions since December 2008, credit consumption is expected to remain subdued for the foreseeable future.

First credit demand decline in 40 years

The survey results are in line with recent official data, which amongst others showed that interest rate sensitive private sector credit demand declined by 0.2% year-on-year (y/y) - the first annual fall since the late 1960s - during September 2009.

The data indicated that credit purchases are being constrained by tight lending standards. Job insecurity amidst weak GDP growth may also be a factor that is holding back big ticket purchases at this stage.

While still under pressure, the rate of decline for sales volumes in the other two surveyed retail categories (non and semi-durable goods) moderated compared with the 2008 Christmas period. "Whereas a net majority of 18% of non-durable goods retailers (mainly food and beverages) reported lower sales volumes (compared with 2007Q4) during the 2008 Christmas period, the percentage came down to only 1% in the final quarter of 2009", Engelbrecht noted.

In essence, overall Q4 non-durable goods consumption is set to be flat when measured on an annual basis.

Almost a million lose jobs

The sector has been the hardest hit by retrenchments during 2009 with the bulk of the 959,000 job losses linked to sectors (such as manufacturing) that mainly employ low skilled workers who spend a large portion of their income on non-durable goods.

The Q4 survey results may indicate that the rate of job cuts moderated somewhat during the final quarter. Furthermore, the fact that annual consumer food price inflation has slowed sharply (from 19.2% y-o-y in August 2008 to 4.9% during September 2009) - along with the accelerated roll-out of the government's social grant programme - also boosted non-durable consumption.

Respondents in the semi-durable (mainly clothing and footwear) goods sector also reported largely flat sales volume growth in 2009Q4 with a small net majority (2%) saying that sales were down compared with 2008Q4.

The flat reading is a far cry from the majority of 38% who said that annual sales were higher during 2008Q4 (in relation to 2007Q4). Semi-durable sales volumes also boomed during the third quarter of 2009 as retailers slashed prices in order to stimulate demand.

While Q3 sales were up, semi-durable retailer profitability came under severe pressure amid intense margin pressure.

The Q4 results indicate that while profitability improved (although still down y-o-y) because of higher selling prices, the implication was a weaker sales volume performance.

Retailers reduce prices

In terms of overall retail selling prices, the news for consumers is more upbeat with almost 30% of retailers saying that they reduced prices this festive season compared with 2008.

"While the lower selling prices is good news for the consumer, when combined with falling sales volumes is wreaking havoc with retailer profitability," said Engelbrecht. A new record high net majority (65%) of the retailers surveyed by the BER indicated that their overall profitability was lower compared with 2008Q4.

2010 Q1 optismism

With the exception of non-durable goods retailers, the retail respondents are more optimistic about sales volumes during the first quarter of 2010.

Overall, 11% of retailers in the three sectors expect a sales volume contraction in 2010Q1 (versus 2009Q1), an improvement from the current 28%.

"Having said that, the 2010Q1 forecast suggests that consumer spending may lag the recovery in other sectors of the economy as high indebtedness, tight (albeit easing) bank lending standards, negative wealth effects, the possibility of significantly higher electricity tariffs and (most importantly) rising unemployment weigh on household finances," continued Engelbrecht.

Impact of reductions still to be seen

However, the full impact of the recent interest rate reductions still has to be seen and - combined with a projected improved GDP growth performance and more moderate job losses - should result in improved spending as we move through 2010.

While the 2010 Soccer World Cup is unlikely to materially boost spending, certain categories (e.g. clothing merchandise tied to the event, restaurants etc) should receive some support.

"While further interest rate reductions are unlikely, the projected muted consumer spending recovery should prevent an interest rate increase anytime soon," Engelbrecht concluded.

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