Retailers pull out stops to lure consumers

Massive discounts are on the cards this festive season as South African retailers brace themselves for the bleakest Christmas in nearly two decades, experts say.

“Retailers will have to go all out this Christmas to entice consumers. I would not rule out big discounts from durables, semi-durables and non-durables retailers,” said Luke Doig, senior economist at Credit Guarantee Insurance Corporation.

November 28 marks the beginning of the traditional Christmas shopping season—putting retailers “in the black”—but sales forecasts for the season are gloomy, with Doig saying his initial forecast of a 2% real decline “looks optimistic”.

Supporting this forecast is this week’s survey by the Bureau for Economic Research (BER) and Ernst & Young, which showed that 13% of the retailers expect lower sales volumes in the fourth quarter of 2008, the weakest result since the 1992 festive season.

Retail sales have dropped every month since May, highlighting the distress faced by consumers given the lagged effects of interest rates hikes between June 2006 and June 2008 and uncomfortably high debt levels.

Meanwhile, earnings reports from several listed retailers show a common theme—slowing top line growth. This raises concerns about retailers’ ability to implement steep price markdowns without affecting the quality of earnings.

“What are they going to do? Better volumes at the expense of margin? I think there is still room to give up some margin, otherwise they’d be sitting with high stock levels in January,” said Doig.

According to a BER/Ernst & Young survey, while more than three-quarters of the respondents raised prices in the third quarter, this came down to 61% in Q4, and less than 50% expect to increase prices in the first quarter of 2009.

“The combination of weak sales growth and reduced ability to raise prices amid falling commodity prices and weak consumer demand have seen retailer profitability decline to levels last seen in 2001/02,” said Derek Engelbrecht, retail and consumer products director at Ernst & Young.

But with fuel prices declining, with the latest cut being a substantial R1,61 per litre, both the retailer and the consumer will have a little bit of extra cash this festive season.

Doig estimates that the fuel price cut in December will add an extra R2-billion, easing production costs for retailers and adding more muscle to fight for a slice of R10,3-billion estimated to be spent this holidays. - I-Net Bridge

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