As interest rate hikes tighten consumer purse strings, retailers are bracing themselves for a disappointing festive season. Large merchandisers, such as the JD Group and Woolworths, are reconciling themselves to a slowdown in festive season activity as volatile fuel prices and consumer indebtedness compounds the effects of interest rate increases on their customers.
”This has clear impacts on the disposable income of consumers,” says David Sussman, executive chair of the JD Group, ”and the negative effect on the consumer has an obvious negative effect on the retailer.”
Joshua Doore, Incredible Connection and Hi-Fi Corporation, all part of the JD Group, have been ”conservative in their approach to the festive season”, says Sussmann. In addition to the interest rate increases, the advent of the National Credit Act (NCA) means consumers are less likely to extend their credit capacity.
”The NCA, in terms of affordability checks, must have a negative impact on how much additional credit consumers get,” he says. ”But it’s not just credit availability [that affects consumers], food and fuel increases also impact on their ability to spend.”
Retailers at the higher end of the market are most likely to see a slowdown in sales as, according to the Bureau for Economic Research (BER), middle- and high-income earners are most likely to feel the effect of rate hikes.
”These consumers will be hardest hit by the interest rate hikes as few low-income consumers have access to credit at banks in the formal sector,” says Linette Ellis, senior economist at the BER. The NCA is also ”forcing retailers to turn down more applications for retail store cards”.
”We are already seeing the impact of the current economic environment on spend this Christmas. Demand is depressed as our customers are funding higher bonds and car loans. Fuel costs and a further interest rate hike will depress spending even further,” says Simon Susman, CEO of Woolworths. ”With less disposable income, we expect our customers to be ever more discerning.”
According to a weekly economics bulletin released by Standard Bank’s group economics unit, consumer spending habits are moderating but staying ”relatively robust”. But the decline in retail sales growth in recent months might dampen expectations for festive season sales.
It also refers to the BER and Ernst & Young’s Festive Season Retail Trends report, which says retailer confidence is down by 13 index points ”amid expectations for slower sales growth over the festive season”.
Despite pressure from the South African Reserve Bank to reduce consumer lending, the research points out that private sector credit extension (PSCE) has only slowed a fraction. Growth in the core PSCE measure, including leasing finance, mortgage advances and instalment sales, slowed to 22,8% year on year in October, from September’s rate of 23,5% year on year.
One retailer is relatively unconcerned by the effect of interest rate increases on sales. Newly branded Pick ‘n Pay is ”foreseeing a good Christmas season”.
”Pick ‘n Pay is a non-cyclical, predominantly cash business,” says spokesperson Tamra Veley. ”As such, it tends to be affected less than others by interest rate increases. Generally, if there is any impact we are the last to feel it. However, any increase in interest rates means less money in consumers’ pockets in the longer term.”
Veley says Stats SA’s reported monthly food inflation for the period October 2006 to 2007 is 12,3%; Pick ‘n Pay’s internal inflation is 8%. ”One of the ways in which Pick ‘n Pay manages to keep prices so low is its strategy of buying forward on a rising market,” says Veley. ”This means sometimes Pick ‘n Pay’s customers are buying goods at a price set weeks or even months before and, therefore, at a lower price than the goods are currently being supplied.”
