With consumer confidence rising and inflation and interest rates falling in the wider economy, South African retailers are anticipating strong sales for the key December period, making up for a first-half of 2003 characterised by sluggish performances.
Robust sales are expected to last through 2004 as the delayed impact of successive interest rates cuts makes itself felt throughout the economy and inflation stabilises within the South African Reserve Bank’s 3% to 6% target range.
Current economic conditions are extremely favourable — the most favourable in years — for high- and middle-income consumers, who are able to benefit from lower prices on most goods, particularly imports, and relatively low interest rates for durable goods bought on credit such as furniture, white goods and electronic and electrical appliances, as well as semi-durables (such as clothing and shoes).
As the FNB/BER fourth-quarter consumer confidence index (CCI) showed, a vast majority of consumers in these income categories believe that the present is a good time to purchase durables.
Although still good, conditions are not quite so rosy for lower-income earners, who are faced with a rising number of job losses as the local manufacturing and export sectors are increasingly forced to lower their costs in the wake of the strong rand and slow economic growth offshore.
Lower interest rates and higher disposable income (after another round of personal income tax cuts this year) have helped to boost the spending of those with jobs, but more and more employed individuals are feeling their jobs coming under threat.
Generally, retailers must be able to offset falling margins (as the consumer inflation rate declines) with a combination of higher sales volumes and lower costs to take advantage of the current conditions.
This is perfectly illustrated by furniture and appliances retailer JD Group, which has reported strong sales growth of more than 15% for September and October across all of its chains, including Joshua Doore, Russels, Bradlows, Price ‘n Pride and Electric Express, as well as the recently acquired Morkels, Barnards and Hi-Fi Corporation.
“If the first two months are anything to go by, we should have a fantastic year in 2004,” JD Group executive chairperson David Sussman said. “Margin growth is also gaining momentum, and we expect further gains in 2004.”
Clothing retailers are also posting good results. Woolworths’s sales are up 11% from 2002 levels, Truworths has reported a 14% rise in sales for the first five months of its 2003-04 financial year, and Foschini has said turnover for the first five weeks of the second half of its financial year is above budget, at a higher growth rate that the first half.
“We remain confident about this important trading period, and expect strong growth in the group’s earnings for the full year,” Foschini said when the group released its interim results in November.
Edcon, the group that owns Edgars, Sales House, Jet, Cuthberts, Smileys Wearhouse, CNA and Super Mart, reported record interim results in November, with retail sales growth of 32% and headline earnings up by 73%. Edcon CEO Stephen Ross said economic conditions “bode well for the festive season, with full-year headline earnings expected to be in line with those at the interim”.
Mr Price Group, the predominantly cash retailer that comprises the Weekend Material, Mr Price Home, Sheet Street, Milady’s, The Hub and Galaxy Jewellers brands, reported a more modest 14% rise in turnover from continuing operations for the six months to the end of September off a high 2002 base. However, management is confident that the second half of the year will be better than the first.
Food retailers such as Pick ‘n Pay, Woolworths and Shoprite could see some of their sales dented by higher purchases in other areas, analysts caution, but the dent is not likely to be significant given the good demand for food normally seen over the festive season.
Pick ‘n Pay and Woolworths in particular are able to offset slower food sales by higher turnover in other goods such as clothing and toys.
On Tuesday First National Bank (FNB) and the Bureau for Economic Research (BER) at Stellenbosch University reported that South Africa’s CCI for the fourth quarter of 2003 surged to +1 index points after plunging to -12 points in the third quarter of the year on the back of a major rise in willingness of top-end consumers to splash out on durable goods.
FNB and the BER said the sharp improvement, to the highest level in four years of economic upswing, set the scene for bumper Christmas sales across the country. Sales of interest-rate sensitive and/or imported durables such as new vehicles, furniture, appliances and electronic equipment were likely to benefit the most, as those earning more than R4 000 per month considered it a good time to buy.
Analysts also caution that, while the local manufacturing industry is set to benefit from robust consumer sales, importers could be even larger beneficiaries as consumers cash in on the strength of the rand.
Still, 2004 is set up to be a good one for both consumers and retailers in South Africa, with the only significant threats to the retail sector seen as a rising current account deficit and possible weakening of the rand triggering higher inflation. — I-Net Bridge