Retailers scaling down their orders

The bleak global economic outlook also steals the glint from local retailers' eyes. According to Nedbank economists Dennis Dykes and Johannes Khosa, the outlook will hurt consumer confidence and heighten concerns over job security, which will make consumers more cautious about spending.

Higher inflation has started to eat into the affordability of consumer goods, while credit growth is not expected to accelerate meaningfully before global risks start to recede.

Derek Engelbrecht, retail and consumer products sector leader at Ernst & Young, said retailers' volumes will moderate further. A retail survey conducted by his group and the Bureau for Economic Research last month revealed that retail volume growth remained subdued in the second quarter of this year.

It also showed that retailers have started trimming orders that they place with wholesalers and manufacturers.

This will trickle down to manufacturers, whose output improved slightly, but by less than expected. Economists expect manufacturing production to remain subdued in the coming months.

SA's main trading partner, Europe, is still going through uncertainties that affect local manufacturers negatively and will continue to do so until the market settles.

Retailers have been negatively affected by high operating costs that grew faster than sales. Fuel costs was one of the major overheads for Spar at 38%, it stated in its recent interim results. Its total operating expenses went up by 11.5%.

Although the petrol price decreased by 55c a litre earlier this month, the price is still 9.8% higher than in January and 33% higher than in January last year.

The latest inflation data from Stats SA showed that food prices were 9.1% higher in April than in April last year.

Shoprite said in its annual report it does not expect pressures on consumers to ease, however, it still expects to maintain "satisfactory" growth in turnover.

Engelbrecht supports this view, highlighting that last year, consumers benefited from the tax relief granted and thus had the ability to spend more. He said in the third quarter of last year there was a 5% increase in disposable income largely thanks to strong growth in property-related income and dividends declared by companies. This translated into consumers having more money to spend.

Source: Business Times