South Africa’s retailers brace for slow holiday season

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Although they benefit from a market with one of the continent’s highest levels of per capita purchasing power, retailers in South Africa have seen limited growth over the third quarter, due in part to rising levels of personal debt and an unspectacular performance in the broader economy.

Figures released by Statistics South Africa in mid-November showed a slight easing in the rate of retail activity. September saw sales increase by 0.2% year-on-year, down from 3.2% the previous month and short of the median average of 2.5% forecast by analysts.

The figures prompted speculation that the South African Reserve Bank (SARB) might delay raising interest rates, and indeed at SARB’s most recent meeting, held on November 21, the central bank chose to keep the repurchase rate unchanged at 5%. The latest forecasts from SARB predict 1.9% GDP growth in 2013, down from an earlier 2% estimate.

Consumer credit pulled back

According to Stanlib chief economist Kevin Lings, the recent monthly variation in retail sales is not overly worrisome. However, the overall trend in consumer spending, which has been falling for some time and is expected to remain depressed, provides a murkier short- and medium-term outlook.

“This largely reflects a moderation in income growth, a sharp slowdown in the growth of unsecured credit, a lack of job creation, falling consumer confidence, and a rise in the cost of living, including the cost of petrol, electricity and education,” he told the local media on November 13.

The impact of the slowdown in unsecured lending was similarly highlighted by comments from Grant Pattison, CEO of Massmart. Speaking to reporters on the sidelines of the Consumer Goods Council of South Africa summit in October, he said, “The pressure on consumers is increasing and it seems to be related to energy inflation and unsecured lending being pulled back.”

While it is having an effect on short-term consumption, the fact that growth in unsecured lending is slowing is far from a bad thing. Indeed, following rapid expansion in unsecured lending between 2010 and 2012, the banking industry has begun to put on the brakes in a bid to reduce systemic risk and avoid unnecessarily high levels of personal debt. The Banking Association of South Africa has drafted a code of conduct for unsecured lending, while regulators are also taking a closer look. In late 2012 the SARB and the Treasury signed an agreement to develop new rules that will promote responsible lending and protect consumers.

As with other areas of the economy, retailers are also grappling with the general macroeconomic outlook, which is ticking upward on an annual basis, but has seen only fitful progress in recent months. Strike action in the automotive sector has been blamed by many analysts for a slowing rate of economic expansion in the third quarter, for example, which registered annual GDP growth of 0.7%, well short of the 3.2% of the previous quarter.

Unemployment also remains high, though the rate did dip below 25% in the third quarter with the economy adding some 300,000 positions, according to Statistics South Africa’s quarterly labour review, issued at the end of October.

Sentiments low

These factors have helped contribute to low confidence levels among both the public and the business community, especially in the retail segment. According to the latest Rand Merchant Bank/Bureau for Economic Research report on business confidence, released on November 18, sentiment in the retail sector dropped sharply in the fourth quarter, dipping from 49 points, just a single notch below optimism, to 40 points, the lowest level since early 2012. The sentiment rating for the retail sector was below the 43 points for the index as a whole. The overall index also rose one point for the quarter, contrasting with the pronounced fall in confidence in the retail sector.

The public’s outlook was more muted, with consumer confidence regarding the outlook for the economy over the coming 12 months dropping to its lowest rate in two decades, according to a report issued in mid-November by the First National Bank and the Bureau for Economic Research. While the survey found some slight improvement in some sub-categories, such as consumer’s willingness to buy durables, this and other ratings remained deep in negative territory, suggesting little enthusiasm for spending in the short to medium term.

There is likely to be a seasonal increase in retail activity, with the holiday period traditionally a time of higher spending, but this may not be even across society, with many on lower incomes set to be more cautious, a view held by Cees Bruggemans, a consulting economist with First National Bank.

“Spending by the higher income segment will provide an anchor but all other factors support the view of a very modest retail environment this festive season,” he said on November 18.

Ultimately, South Africa has a number of factors which make it a favourable market for retailers, particularly in a regional context. Compared to other major markets like Nigeria or Kenya, lower overheads and quicker turnarounds for electricity and distribution, for example, provide scope for larger margins, and a more robust consumer population – with comparatively open access to credit – makes for a more sturdy level of demand. However, the swings and roundabouts of the South African economy means nothing is ever straightforward and retailers will need to navigate a number of tricky short-term challenges to avoid a drop in revenues for the last quarter of 2013.

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