Survey finds that the growth in retail sales volumes is expected to remain lacklustre

According to Statistics South Africa, the growth in retail sales volumes measured 2.5% year on year during 2014Q4 and in 2015Q1, with the EY/BER Retail Survey pointing to another quarter of lacklustre volume growth of between 2% and 2.5% year on year in 2015Q2.

Derek Engelbrecht, Consumer Products & Retail sector leader at EY, said: "When surveyed during the first quarter, most retailers expected a marked improvement in retail sales growth during the second quarter, but it appears as though this has not materialised. Retailers in non-durable goods were particularly disappointed, as lower fuel prices, a deceleration in food inflation and a recovery in strike-affected incomes compared to 2014Q2 failed to lift non-durable goods volume growth in line with their expectations. Instead, it appears as though adverse developments, such as rising unemployment, higher personal income and indirect taxes, a slowdown in government spending growth and frequent power outages kept the lid on non-durable goods sales during 2015Q2."

The EY/BER Retail Survey results suggest that the growth in semi-durable goods sales volumes (e.g. clothing, footwear, toys and sporting equipment) remained around 3.5% year on year in 2015Q2 (similar to 2015Q1), but furniture and household appliances sales growth deteriorated notably.

"Factors such as muted growth in household credit extension, weaker growth in residential building activity, a slump in consumer confidence levels and the further depreciation in the rand exchange rate tend to weigh down furniture and household appliances sales in particular," said Engelbrecht. Trading around R/$12.20 in recent weeks, the rand exchange rate has depreciated by 15% against the US dollar since June 2014, putting significant upward pressure on the prices of imported goods, such as household appliances, computers and other electronic goods.

Confidence levels have declined

In addition, consumer confidence levels have declined notably since the end of 2014, signalling a greater reluctance to spend and utilise credit - when consumer confidence is low, households typically postpone their durable goods purchases.

In sharp contrast to the subdued sales growth recorded in the broader trade sector, hardware, paint and glass retailers indicated that their sales growth remained robust during 2015Q2. According to Statistics South Africa, the volume growth of retailers in hardware, paint and glass surged from 1.4% year on year in 2014Q4 to an impressive 8.5% year on year in 2015Q1, compared to volume growth of only 1.7% year on year for the rest of the retail sector in 2015Q1. Apart from sustained, albeit muted growth in building activity, these retailers continue to experience increased demand for products that could be utilised during power outages, such as torches, batteries, gas stoves and lamps, uninterruptible power source (UPS) batteries and generators.

Looking at input costs and selling prices, the majority of retailers surveyed reported a significant uptick in their cost inflation and a slight increase in their selling price inflation. Given a R3 per litre increase in the petrol price and a further depreciation of 70 cents per US dollar in the rand exchange rate since February 2015, it is not surprising that retailers are experiencing significant upward pressure on their input costs. Engelbrecht pointed out that: "Although the profitability levels of retailers have improved over the last 6 to 9 months, weaker demand growth will make it increasingly difficult for retailers to pass the full impact of higher input costs on to consumers in the form of higher selling prices."

Blow to retailer confidence

To be sure, the trade sector continues to outperform the beleaguered manufacturing and mining sectors. However, the deterioration in business conditions during 2015Q2 has dealt a blow to retailer confidence. Only 52% of the retailers surveyed by the BER indicated that they were satisfied with prevailing business conditions in 2015Q2, down from 60% in 2015Q1.

Engelbrecht said: "The outlook for retail sales growth in the second half of 2015 has deteriorated on the back of a further depreciation in the rand exchange rate, rapidly rising fuel prices, an increase in personal income taxes for high income consumers, the withdrawal of the proposed R15 billion reduction in UIF contributions by employers and employees and declining consumer confidence levels. Apart from tighter fiscal policy, the South African Reserve Bank will, in all likelihood, also resume with its interest rate hiking cycle during the second half of 2015. Combined with the adverse implications of the deepening electricity supply constraint for job creation, as well as on the sales of retailers that do not have alternative power sources, the growth in retail sales volumes is expected to remain lacklustre around 2% year on year in 2015."