File photo by Delwyn Verasamy/M&G
Retailers are bracing for conditions to worsen in the near term, with profitability taking a knock from soaring costs partly related to load-shedding.
According to the Bureau of Economic Research (BER), confidence in the retail sector has fallen in the face of persistently high food inflation and rising interest rates.
A survey by the BER showed retailer confidence dropped 14 percentage points — from 34% of respondents in the first quarter of 2023 to 20% in the second.
The research institute said during the second quarter its retailer confidence and profitability indices both slumped to their lowest levels since the same period in 2020, when the government implemented a hard lockdown to try to curb the spread of Covid-19.
“Load-shedding increases operational costs for retailers that must invest in backup power or buy diesel for generators. It also affects consumer confidence and directs spending away from retail,” the BER said.
The retail sector is stuck in a low-growth environment because people are spending less or spending down where possible, independent analyst Simon Brown said.
“The consumer is broken. High rates coupled with inflation and modest wage growth have seen consumers under really severe pressure. Disposable income has been crushed and debt costs have risen markedly,” he said, adding that the outlook for the retail sector was bleaker still.
“They are not in as much trouble as they are still going to be in, because costs are up and sales are weaker. This squeezes margins and profits.”
The latest available data from Statistics South Africa shows that retail trade sales decreased by 1.6% year-on year in April 2023, marking the fifth consecutive contraction. This followed a similar contraction in March 2023.
The decline in retail sales has resulted from historically high prices reflected in an inflation rate that has held above the ceiling of the South African Reserve Bank’s 3% to 6% target for 12 consecutive months.
Continuing inflation prompted the Reserve Bank to raise the country’s borrowing rate by 50 basis points for two monetary policy committee meetings in a row, despite weak economic growth in the first quarter of the year and a slight uptick in the country’s already high unemployment rate. The latest hike in May officially landed South Africa’s monetary policy in restrictive territory.
“The retail environment has not experienced this kind of pressure since our democracy,” said Casparus Treurnicht, a portfolio manager at Gryphon Asset Management.
“The consumer is trying to save as much as they can on discretionary items, while cash is being used for only the most basic of items, and the reason is clearly high inflation combined with accompanying higher cost of credit while wage inflation has not increased in similar fashion. What this all meant was that disposable incomes have severely taken a knock.”
Treurnicht said the kinds of profits seen by the retail sector in the past were long gone, adding: “Our retail operators are probably the best in the world so even though I think they will be under pressure for the next five years they will probably just chug along.”
The knock-on effect of prolonged contractions in retail sales is usually seen in the retail property market.
FNB property strategist John Loos said the decline in retail sales signals bigger problems for the retail property sector, such as rising electricity costs, which are also having to be absorbed by tenants and landlords.
“Not only are electricity tariff hikes continuing at above general inflation rates, but the erratic power supply necessitates costly power alternatives to keep stores running, and the high costs of diesel for generators have been widely reported by food and beverage retailers especially,” said Loos.
The cumulative total of 425 basis points of interest rate hikes since November 2021 has also exerted pressure on landlords, tenants and consumers alike, he added. The problems of today also add to those of the pandemic, which set the retail industry back heavily, Loos noted.
Since the Covid-19 lockdowns commenced, credit bureau TPN reported that retail landlords had the lowest percentage of tenants in good standing with their rental payments, when compared with the office and industrial property sectors.
This indicates significant financial strain on retail property tenants, compounded by declining real retail sales and higher interest rates, Loos said.
FNB’s Property Broker Survey also points to a weakening retail property market, with vacancy rates increasing and rental growth slowing.
“We expect a renewed rise in the national retail vacancy rate in 2023 as tenant incomes come under greater pressure and financial pressures escalate,” Loos said.
Brown said evidence of distressed retail sales translating to trouble in the property market had been seen in real estate investment trusts (REIT) results.
“The recent FNB commercial survey did show weakness in all sectors (logistics/industrial, office and retail). The recent Growthpoint update shows struggles as well, lease renewals still in the negative,” Brown added.
Growthpoint, which has a 50% stake in the V&A Waterfront and owns Woodmead Retail Park and N1 City Mall, released an update for the nine months ended 31 March 2023 on Thursday which showed its vacancy rate for its retail portfolio was 6.1%.
“We are addressing significant vacancies through letting strategies, property disposals and redevelopments,” the REIT said in a statement to shareholders.
For its retail portfolio, Growthpoint said its renewal success rate of 79.1% was negatively affected by the non-renewal of Ster Kinekor at Festival Mall as well as Cinema Nouveau at Brooklyn Mall. Some office tenants at Golden Acre also chose not to renew their leases or have downsized.
“Over the last quarter, retailers faced added challenges from increased load-shedding, resulting in higher costs and slower trading density growth caused by reduced trading hours. Higher inflation and interest rates remain concerning as it impacts consumer spending. With decreased disposable income, consumers continue to prioritise value and non-discretionary purchases.”
The REIT said it collaborates with banks to downsize where it is commercially wise, which often provides an opportunity to enhance tenant variety. It also continues to right-size and optimise retail spaces with national retailers that have an increased demand for space.
The spillover into the retail property market is a serious risk, Treurnicht said.
“There have been plenty of developments over the past few years and much of that has been built with debt on property companies’ balance sheets. We are seeing interest rates starting to put massive pressure on the property sector. This is also a sector that goes through very long cycles, and we are not even close to recovery mode,” he said.