Consumers will be counting their coins closely this year as high food inflation, spiralling electricity costs and fuel price hikes bite hard. Yet despite the pressure on wallets, retailers are not likely to change their game plans.
Food outlets that target middle-income segments will be hardest hit, whereas high-end retailers will carry on as usual and low-end stores can bank on the government's social security net, which allows the poor to put some food into empty stomachs.
In the fourth quarter of last year, consumer confidence – for the second time in 2012 – slipped back to levels last seen at the start of the global financial crisis in the second half of 2008, according to the First National Bank/Bureau for Economic Research consumer confidence index.
Rising inflation, a deteriorating outlook for income growth and low consumer confidence levels point to subdued growth in household expenditure in 2013, the index stated.
Consumers are more cautious about buying durable items, which correlates with the slowdown reported by furniture and household appliance retailers since the end of 2011, said Cees Bruggemans, FNB's consulting economist.
The rand, which lost 15% against the dollar between March and December 2012, is affecting durable goods sales volumes, according to the index. Economists cited by Moneyweb expect weaker rand levels to persist for quite some time.
Whereas consumers may put off buying new appliances, choosing to rather replace when necessary, they still have to eat. However, habits will change as people choose cheaper cuts of meat and trade down, said Absa Investments analyst Chris Gilmour.
The National Agricultural Marketing Council said the weaker rand has influenced commodities and food items that are imported or exported. Wheat and chicken meat prices are increasing on the back of higher import parity prices, and fruit prices are going up due to higher export realisations, the council said.
Slight improvement
Gilmour said retailers will carry on as usual and decent results are expected unless interest rates are hiked, which he does not anticipate until at least 2014. Stores are doing what they can to keep prices down, with scope to trim costs from the rest of the value chain. Investors need to pick their shares carefully, he said.
The 2013 economic outlook is similar to that for 2012, although a slight improvement is expected, added Gilmour. Factors weighing on the outlook include the weak rand, which affects fuel and food.
However, he warned that South Africa risks entering a period of "stagflation" unless growth moves to 4% or 5% – a huge ask as the country ended 2012 at about 2.5% growth. Stagflation – when economic growth is low and unemployment is high, accompanied by rising prices – feeds on itself and is hard to get out of, he explained.
Food inflation is high, rising and approaching double digits, said Gilmour. Although the Reserve Bank is doing a good job of trying to keep a lid on overall inflation, he pointed out that many factors such as oil, the rand and unemployment are beyond the bank's control.
According to the agricultural marketing council, in its latest monitor, published in November, inflation on food and non-alcoholic beverages moved to 6.3% in October. Year on year, brown bread became 8.91% more expensive and the price of white bread increased by 9.41%.
The council said food inflation is expected to continue to rise until February. "It is likely that the year-on-year food inflation rate will increase as agricultural commodity prices remain high, and the recent meaningful weakening of the exchange rate will drive other costs in the value chain, for instance transportation."
Rising inflation
Although motorists benefited from a welcome decrease in the fuel price to kick off the new year, the cost has risen steeply in recent years. In Gauteng, 95-octane petrol has gone from R7.86 per litre in January 2010 to R11.86 in January 2013 and at the coast, the price has risen from R7.63 to R11.51, according to the energy department. And electricity prices will climb again in midyear.
Gilmour said the low end of the market, which is served by stores such as Shoprite, will do well despite rising inflation and a curb on spending. He noted that the small individual amounts spent by social grant recipients add up collectively.
Between April 2012, when Shoprite started paying out social grants, and June 2012, the chain made more than three million payments to recipients who, as a group, form an integral part of its target market.
Last February, Finance Minister Pravin Gordhan said spending on social grants will grow from R105-billion in 2012-2013 to R122-billion in 2014-2015. At present, about 16-million South Africans receive social grants.
Yet it is the poor who are hardest hit: inflation is at 12.5% for the five most widely consumed food items, the council said. Most of the price push is due to maize, although bread and milk have also contributed.
Retailers say they constantly seek to keep a lid on costs. Pick n Pay spokesperson Tamra Veley said the retailer uses several strategies to keep prices down, including negotiating with suppliers, employing specialist buyers and centralised buying. "Our central distribution system, when at full capacity, will allow us to effect quite a number of savings," she said.
Deep discount
Veley said the group uses its buying power to "deep discount" during special promotions, passing savings on to consumers.
Gilmour said he expected the middle-income consumer segment, served by outlets such as Pick n Pay, to be hardest hit this year, whereas high-end stores will be stable.
Woolworths does not expect any negative changes in spending, despite consumers becoming more discerning and careful about where they spend their money. Its strategy is not set to change, the retailer said, although it will continue to simplify how it does business and emphasise tighter cost controls.
Writing in the Woolworths annual report, chief executive Ian Moir predicted that the economic environment in the coming year will remain similar to that characterised by the year to June 2012. The company does not expect any upward pressure on interest rates in the short to medium term and upper-end consumers will be in a similar spending position to the last two years, he said.
Moir said Woolworths will continue to pursue its current strategies in food and clothing as well as general merchandise. It wants shoppers to spend more in its shops and it will be expanding its footprint and keeping prices competitive.
Although the Shoprite Group will not speculate on consumer trends for 2013, it believes it can follow the market and adapt within short time frames. In August, chief executive Whitey Basson, commenting on the group's annual results, said its ability to keep inflation in its supermarkets below official food inflation was thanks to strict cost controls and an efficient supply chain infrastructure.
Basson does not see the future trading environment changing in any material way. "Nothing on the horizon suggests that the pressure on consumers' disposable income will ease. Shoprite will, however, do everything in its power to mitigate the impact on its customers of the severe drought in large parts of the American bread basket on local food prices. "
Consumers face high levels of unemployment, rising electricity, schooling and transport costs and the impact of a weaker rand, Basson noted, adding that inflation had increased across the spectrum but food had been hit particularly hard.
"However, the government played its part in assisting consumers and the economy by keeping interest levels at their lowest in 30 years while continuing the payment of social grants, from child maintenance to old-age pensions, to an increasing number of low-income recipients."