South Africa’s retail spending boom is likely to continue for at least the next 12 months — but could last longer if the economy enjoys broad-based, job-creating growth, say two leading analysts.
Dennis Dykes, chief economist at Nedcor, and Evan Walker, retail analyst at Andisa Capital, also see the rapid depreciation of the rand as the greatest threat to the spending splurge.
Last December Statistics South Africa reported that consumers spent a record R33,22-billion, a year-on-year growth of 9%. The most recent figures show that in May, retail spending grew at an annualised rate of 10,3%.
The latest signs of the good times were reflected by retail giant Massmart when it unveiled its results for the year to June on Thursday.
The group reported a sales rise of 17% to R24-billion. Profits were up 24% to R929-million, while cash flow from operations was up by 62%, to R1-billion.
Massmart CEO Mark Lamberti stated modestly: “Given the extremely buoyant middle- to upper-income consumer market, we cannot take too much credit.”
Massmart has exposure to key parts of the retail sector. It owns Game, Dion and wholesale giant Makro, as well as Builders Warehouse and Tile Warehouse, low-income food retailer Jumbo and furniture merchants Furnex. With the exception of Game, Massmart runs a cash-based business.
Last week, Woolworths Holdings reported a 19,6% increase in operating profits, to more than R1-billion. Retail sales in Woolworths had grown 15,2% over the year to R9,7-billion.
Also reporting this week was Shoprite Holdings, whose results were less impressive. The group came under pressure from low food inflation of 3,6% during the year, but recorded a 7,5% increase in revenue to R27-billion, largely as a result of cost containment.
Dykes pinpointed the start of the retail boom to last July, a month after Reserve Bank Governor Tito Mboweni embarked on the first in a series of interest rate cuts that brought the prime lending rate from 15,5 % to 11,5% in December.
The main driver of the boom is positive growth in real wages — the differential between nominal wage increases and inflation. Inflation, especially food inflation, has been kept low by the strength of the rand. CPIX — inflation minus mortgage rates — currently stands at 4,2%, while wage settlements are running at between 7% and 8%.
Dykes said he expects spending to lose momentum next year, because wage settlements are backward-looking and next year’s pay talks will be shaped by this year’s low inflation rate. But inflation will have have risen in a year, narrowing the differential.
He said the last time South Africans had it so good was after the 1994 election. Then, as now, there was widespread optimism about the country’s prospects after a successful election.
He sees growth in jobs — which he believes is not far off — as the best way to keep the party going. “At the moment, a relatively small percentage of people are spending.” The last improvement in official employment statistics was registered in the non-agricultural formal sector in 2002, when, in the wake of a rand crash, exporters laid expansion plans and construction and mining showed some growth.
An interesting feature of the current boom is that much of the sales growth has been in durable and semi-durable goods, implying that when it ends, South Africans will boast greater asset wealth.
Walker estimated that the durable goods market had seen nominal growth of 15% over the past year. Semi-durable goods, mainly clothes, grew at 20% while non-durables grew at 10%.
Encouraged by wage settlements between June and October this year, Walker expects the next 12 months’ spending to be robust. He predicts that retail earnings would grow by more than 20%.
Walker identified three broad areas of growth. At the bottom end of the market, low food inflation had helped divert spending to other areas. Walker saw jobs cuts as the party pooper in this market, but also said “we are underestimating the undercurrent of the informal sector in the economy”.
For middle income earners, Walker said spending was driven by “the transformation of the workplace” — a growth in black employees, including university graduates who were first-time purchasers of domestic goods and cars.
The final category was the genuinely wealthy, who were reacting to the interest rate stimulus. On large bonds, a 0,5% rate cut frees up thousands of rands.
In addition, most South Africans appear not be drowning in debt. The percentage of household debt to income is 55%, a proportion Dykes described as “not drastically high”. In Britain, for example, the percentage is a staggering 130%.
Dykes said he thought income growth flowing from an improved employment market would keep the ratio in check.
Walker observed that as the debt-to-income percentage had been close to 70% in the past, the economy was in reasonable shape.
Dykes said there is a chance of a 0,5% interest rate cut in October, but it is more likely that the next adjustment will be a 1% to 1,5% increase next year.