Broad based deterioration in retail sales growth during 2012 Q2

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Results from the latest Ernst & Young / Bureau for Economic Research (BER) Retail survey reveal that the growth in retail sales volumes slowed notably during 2012Q2, with retailers in durable goods (hardware, paint & glass and furniture & household appliances), semi-durable goods (e.g. textiles, clothing, footwear, toys and CD’s) and non-durable goods (e.g. food, beverages, tobacco, cosmetics and pharmaceuticals) all reporting lower volume growth rates compared to the first quarter of 2012.

Official retail sales data released by Statistics South Africa shows that the growth in retail sales volumes already slowed from 7.8% year on year (y-o-y) in 2011Q4 to 5.9% y-o-y in 2012Q1 and slumped to only 1.0% y-o-y in April 2012. The further deceleration in retail sales growth in April 2012 as reported by Statistics South Africa correlates with the findings from the second quarter Ernst & Young / BER Retail survey. However it should be noted that the particularly low year-on-year growth rate for April 2012 (1.0%) can partly be ascribed to the relatively high base created in April 2011 when retail sales volumes were boosted by the concentration of public holidays in late April and early May 2011 and additional school holidays after the Easter weekend.

Retail graph showing confidence slumps as growth in retail sales volumes slows 

According to Derek Engelbrecht, Retail and Consumer Products Sector leader at Ernst & Young, the results from the Ernst & Young / BER Retail survey, which was conducted in May 2012, suggest that volume growth remained subdued and retailers have now started to trim the order volumes that they place with wholesalers and manufacturers.

The slowdown in domestic retail sales growth, coupled with a substantial escalation in the Eurozone debt crisis and concomitant deterioration in the outlook for global economic growth, lead to a marked decline in the confidence levels of retailers during the second quarter of 2012. The percentage of retailers reporting that they are satisfied with prevailing business conditions fell from 61 during 2012Q1 to 39 in 2012Q2 – the lowest level in two years.

The Ernst & Young / BER Retail survey results suggest that non-durable goods and durable goods recorded slower volume growth during the second quarter compared to semi-durable goods. “Up and until the first quarter of 2012, the growth in the sales volumes of durable goods far outstripped that of the clothing & footwear and food, beverages & tobacco categories, but it now appears as though the sales growth of retailers in furniture, household appliances and hardware in particular are coming off the boil,” said Engelbrecht.

Another striking feature of the latest Ernst & Young / BER survey results is the fact that the majority of respondents – particularly in the non-durable goods sector - reported that both input costs and retail selling prices continue to increase rapidly. High food and fuel prices have now started to erode the purchasing power of households and are weighing down non-durable goods sales volumes.

Although the petrol price decreased by 55 cents per litre on the 6th of June, the petrol price is currently still R1.00 per litre (or 9.8%) higher compared to its January 2012 level, and a whopping R2.83 per litre (or 33%) higher compared to January 2011. The latest CPI inflation data from Statistics South Africa shows that food prices were 9.1% higher in April 2012 compared to April 2011.

In contrast, semi-durable goods retailers reported that input cost increases eased somewhat during 2012Q2, after higher cotton prices, rapidly rising Chinese wages and a depreciation in the Rand exchange rate pushed clothing and footwear prices significantly higher over the last year.

Looking ahead, the growth in retail sales volumes is likely to moderate further during the second half of 2012, as real income growth is expected to slow. Engelbrecht said that, “Solid job creation during the second half of 2011, significant tax relief and strong growth in household income from property on the back of a 30% rise in dividends led to a 5.0% increase in the real disposable income of households during 2011.

Conversely, consumers were afforded very limited real tax relief this year, while the deterioration in business sentiment around the globe will likely weigh on both domestic employment growth and household income from property during 2012.”

In addition, higher inflation has started to eat into the affordability of consumer goods, while credit growth is not expected to accelerate meaningfully before global risks start to recede.

However, Engelbrecht pointed out that higher retail selling prices could counter some of the adverse impact of slower volume growth on retail turnovers.                        

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