Tax and interest rate cuts have helped put the South African shopper in a better mood, this week’s first salvo of company results in the retail sector showed.
Retail group Woolworths reported a jump of 47,3% in headline earnings per share for the year to June, while Massmart, South Africa’s leader in general merchandise, on Wednesday announced results showing the sixth consecutive year of growth, with sales almost doubling since the group listed three years ago.
Earlier this week, Shoprite confirmed its position in the number one spot on the continent when it announced a 13% growth in revenue.
Local shoppers are not alone as figures from both the United States and the United Kingdom point to an increase in retail spending habits.
John Stopford, portfolio manager at Investec Asset Management whose sleuthing work recently uncovered Statistics South Africa’s overestimation of consumer inflation, said after last week’s repo rate cut of one percentage point that the “durability of domestic demand and the willingness of consumers to borrow at current rates suggest that the Reserve Bank has no reason to act aggressively”.
Stopford also noted that a broad range of economic and market indicators are pointing to a rebound in the local and global economies.
The most recent measurement from StatsSA reveals that May was the third month this year with an absence of inflation at the retail level. Local retail sales surged by 2,9% month-on-month in May. That brought the year-on-year change to 3,6% from only 2,2% in April.
Retail trade sales for the first five months of this year increased by 3%, with 14 of the 19 merchandise categories reflecting increases in sales. Glass, crockery, cutlery and kitchenware sales surged 11,4% and inedible groceries sales jumped 6,8%.
These increases were partially counteracted by decreases reported for jewellery, silverware, watches and precious stones (-11,3%).
According to the latest market forecast from Standard Bank’s economics division, the prime rate is expected to drop to 12% by June next year and remain at that level for at least a year. The prime rate was cut to 14,5% last week from 15,5%.
This week’s retail results were particularly impressive in the light of the rand’s recent unexpected strong performance.
Exchange rate volatility presented “unprecedented challenges to the management of sales, margin, inventory and foreign earnings”, Massmart chief executive Mark Lamberti said.
Massmart includes Game, Dion, Makro, Builders Warehouse, Tile Warehouse and Jumbo Cash & Carry.
Lamberti said that the lagging effects of the sharp deterioration of the rand against the currencies of South Africa’s trading partners in late 2001, its equally dramatic recovery to date and the consequent impact on inflation and interest rates, had resulted in distinctly different trading conditions in Massmart’s first and second halves.
“In the first half, sales growth was enhanced by rising inflation, higher volumes resulting from improving consumer confidence, and direct and indirect export opportunities arising from a weak rand, which also enhanced foreign sales reported in the currency,” commented Lamberti.
“As the four interest rate increases of 2002 took effect around December, volume growth slowed concurrent with a firming rand, which curtailed exports and rendered certain imported stocks uncompetitive. Inflation declined sharply and retail consumers held back in anticipation of promotional activity and lower imported prices.
“Wholesale customers correctly deemed it prudent to reduce stock holdings, on the assumption of declining prices.”
The impact of these changing trends differed across Massmart’s broad geographic and product portfolio. Highly competitive, directly imported general merchandise and liquor with long lead-times became overpriced as the year progressed, as did indirect imports or products with a dollar- influenced cost.
Within the food category the cost prices of selected products were driven higher by shortages arising from drought, exports and feeding schemes in neighbouring states, while speculation on maize futures drove up the price of South Africa’s staple starch for millions of consumers.
“Within this environment, the management of prices, promotions, margins, inventories and expenses assumed unprecedented levels of complexity, mitigated only by exceptional management information, thorough analysis, and a rapid response,” Lamberti said. South African wholesaler Massmart on Wednesday reported a 32,3% increase in headline earnings per share to 242,4 cents for the year ended June 30.
The group reported a 22% increase in sales to R20,370-billion while net profit for the year rose 33,5% to R429,3-million.
Whitey Basson, the chief executive of Shoprite, said consumer demand remained better than expected, especially when measured against the backdrop of high food inflation for most of the group’s financial year and increased housing, transport and electricity costs and lower average wage increases.
Earlier this week, Shoprite announced 13% growth in revenue to R25-billion from operations that now comprise 641 stores in 14 countries employing 66 000 employees and affirming the group’s status as leading food retailer on the continent.
Operating profit before exchange differences increased by 21% to R603-million. Headline earnings decreased by R80-million to R292-million mainly as a result of exchange losses sustained by converting foreign operations to rand. Headline earnings adjusted for exchange differences, however, increased by 21% to R40- million.
Woolworths experienced strong consumer demand late last year, but this was offset by initial high interest rates and the late arrival of winter, the group said in a statement.
Against this background, Woolworths sales still managed to increase by 15,4%. Improved market share in clothing and food was a key factor in the sales achievement.
On Thursday, the company reported final headline earnings per share of 64,8 cents for the year ended June 30 — up 47,3% from the previous 44 cents.
Woolworths said headline earnings from continuing operations grew 34,5% to R563,2 million. Operating profit was up 29,6% to R888-million from an increased total revenue of R10,1 billion rand (compared with a previous R9,02-billion). The company’s food division exceeded expectations, with sales jumping 20,6%.
“We believe that in South Africa the ongoing impact of reducing interest rates should, together with real easing of inflation, lead to an increase in our customers’ disposable income and confidence by the second half of the financial year,” the group’s statement read.
With consumer demand on the mend, retailers’ presence in Africa is about to grow dramatically. Massmart has committed itself to open or acquire at least 44 stores in Southern Africa — at least 10 in the current year.
Shoprite has approved the opening of 64 supermarkets in South Africa this year, of which 43 are Usaves. It also has plans for 44 OK franchise stores. The group’s objective for growth outside South Africa is to gain a foothold in the most lucrative markets as soon a possible — 32 stores have been approved for opening during the new year with 10 of them in Angola (4 stores), Ghana (5 stores) and India (1 hyper-store). — Additional reporting by I-Net Bridge