25 August 2008
editorial
Johannesburg — THE latest round of financial results and trading updates from JSE-listed retailers confirms the downturn that is evident, at macro level, in data from Statistics SA showing that retail sales have been falling in real, inflation-adjusted terms for some months.
In June, retail sales were down 2,6% in real terms, and for the second quarter the trade sector as a whole was a drag on SA's economic growth for the first time in seven years.
So the boom times in consumer spending have clearly ended, as higher interest rates as well as higher food and fuel prices have savaged disposable incomes.
But the reports from the retailers help to fill in the details of the downturn story, a story that is likely to get quite a lot worse before it gets better. One trend that emerges clearly is that durables such as furniture have been much harder hit than perishable goods such as food, with semidurables such as clothing somewhere in the middle. This is as one would expect, given that durable goods sales are the most sensitive to higher interest rates and tighter credit criteria. So, for example, while grocery group Shoprite reports its total sales increased a fairly robust 22,3% in the year to June, furniture and appliances group Ellerines' sales for the six months to June were down 4,3%. Woolworths' food sales increased 18,8% in the year to June; its clothing sales were up only 6%, although clothing retailer Truworths reported sales growth of 16%.
Remember, though, that inflation always flatters retailers' revenue lines: factor in inflation and these growth figures look a lot more subdued.
Factor in another key integer -- space -- and they look even less impressive. One thing that jumps out of this round of retail results is the extent to which there has been something of an orgy of store opening in the past few years. That has helped to boost turnovers in the shorter term but in the next couple of tough years the excess of space may not make things any easier for SA's leading retail chains, whose numerous new stores are in some cases already cannibalising old stores.
The space story is evident in the difference between total sales growth and " like-for-like" growth, excluding the effect of additional stores. At Woolworths, for example, turnover was up 15,5% but store footage expanded 7,3%; at Truworths, the robust 16% sales growth reduces to 8% on a like-for-like basis, though at Shoprite, the like-for-like growth was still a healthy 18%. Shopping mall developments have long lead times so new stores will still be opening for a while yet, but retailers will be cancelling new space if they can, so sales growth will be slower next time round.
Sales are also shifting from credit to cash, so retailers that make a lot of their money selling money rather than merchandise will feel the effects. Retailers and bankers have tightened credit criteria significantly in response to higher interest rates and the strictures of the National Credit Act. So if people can still afford to spend, they're using cash in preference to cards or hire purchase (at Ellerines credit sales fell from 56% of the total to 44%, though some of that was because new parent African Bank is sweeping clean).
That is probably just as well for retailers, given that default rates are already running higher than they have for some time. One analyst notes the bad-debt ratio across the sector is at 11%-12%, much higher than the 9% seen in the last retail downturn in 2003.
Consumers took a long time to curb their spending as interest rates rose, but now they are clearly taking strain. And it's not just the cost of money that's biting but also fuel and food, and in the coming months higher electricity prices and municipal rates will add to the pressure. So, for retailers, as for banks, it's time to show restraint and slow down on extending credit and expanding stores.
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