Retail confidence improves on the back of strong clothing and footwear sales growth

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Results from the latest Ernst & Young / Bureau for Economic Research (BER) Retail survey reveal that, bolstered by solid clothing and footwear sales growth, the confidence levels of retailers improved further during the first quarter of 2012. The percentage of retailers reporting that they are satisfied with prevailing business conditions increased from 56 during 2011Q4 to 61 during 2012Q1, after slumping to below 50 in mid 2011. According to Derek Engelbrecht, Retail and Consumer Products Sector leader at Ernst & Young, this is the third consecutive improvement in the retailer confidence index, and only the second time since 2007 that more than 60% of the retailers surveyed by the BER reported that they are satisfied with prevailing business conditions in the sector.

Retail confidence improves on the back of strong clothing 

The improvement in retailer sentiment correlates with the uptick in the RMB/BER Business Confidence Index (BCI) during 2012Q1 – business confidence levels increased in all of the sectors surveyed by the BER, namely retail, wholesale, manufacturing, building contractors and new vehicle dealers. Nevertheless, along with new vehicle dealers, retailers remain substantially more optimistic about prevailing business conditions compared to wholesalers, manufacturers and building contractors, where less than 50% of respondents are currently satisfied with prevailing business conditions.

Looking at a breakdown of the survey results per retail sub-category, it is clear that retailers in semi-durable goods (e.g. textiles, clothing, footwear, toys and CD’s) saw the highest volume growth during 2012Q1. According to Statistics South Africa, textiles, clothing and footwear sales volumes increased by a remarkable 10.4% year on year    (y-o-y) during 2011Q4, with only the durable goods category (hardware, paint & glass and furniture & household appliances) recording higher volume growth (11.7% y-o-y) in 2011Q4. “Boosted by very low interest rates and an uptick in credit growth, as well as solid job creation during the second half of 2011, semi-durable goods sales volumes remained strong during the first quarter of 2012,” said Engelbrecht. The Quarterly Labour Force Survey (QLFS) by Statistics South Africa shows that – after shedding 870 000 jobs during the recession, and virtually no job growth during 2010 and in the first half of 2011 – the South African economy created roughly 370 000 jobs during the second half of 2011.

Apart from impressive volume growth, the profitability levels of clothing retailers are also being boosted by higher selling prices, and, consequently, clothing retailers are currently seeing double-digit turnover growth. Engelbrecht pointed out that “the lagged impact of extraordinarily high cotton prices in the first half of 2011, rising wages and a weaker rand exchange rate have led to substantial increases in purchasing prices, but resilient consumer demand has also allowed clothing retailers to pass cost increases through to consumers in the form of higher selling prices”. The majority of semi-durable goods retailers surveyed by the BER remain confident about the outlook for the second quarter of 2012, although they do expect volume growth to ease somewhat.

In contrast to semi-durable goods retailers, retailers in non-durable goods (e.g. food, beverages, tobacco, cosmetics and pharmaceuticals) and particularly in durable goods (furniture, household appliances and electronic goods) reported that the growth in their sales volumes slowed during the first quarter of 2012. “To be sure, solid employment growth also stimulated non-durable goods sales volumes towards the end of 2011, but it appears as though soaring food and fuel prices have now started to erode the purchasing power of households and are weighing down non-durable goods sales volumes,” said Engelbrecht.

In the case of hardware, furniture, household appliances and electronic goods, it appears as though the durable goods replacement cycle may now be nearing an end. During 2011, low interest rates and price discounting helped durable goods retailers to maintain very high volume growth, with retail sales data from Statistics South Africa showing that durable goods sales volumes surged by 10.3% during 2011 (on top of the 5.3% growth recorded in 2010). “However, results from the latest Ernst & Young/BER retail survey suggest that volume growth in the durable goods category slowed markedly during the first quarter of 2012, and that the profitability of durable goods retailers is now under severe pressure,” Engelbrecht said. The slowdown in durable goods retail sales correlates with the deceleration in the growth of vehicle sales in the first quarter of 2012. NAAMSA estimates show that the growth in new passenger car sales slowed from 15.8% y-o-y during 2011Q4 to 7.1% y-o-y during the first two months of 2012.

According to official retail sales data released by Statistics South Africa on 14 March, the growth in retail sales volumes accelerated from 6.1% y-o-y during 2011Q3 to a whopping 7.8% y-o-y in 2011Q4 – the highest volume growth rate since 2007 – before slowing to 3.9% y-o-y in January 2012. The results from the latest Ernst & Young/BER retail survey suggest that, while semi-durable goods sales volumes remained relatively strong during 2012Q1 as a whole, volume growth in other retail sales categories declined. “Nevertheless, given the fact that food and clothing prices are still on the rise, the turnover growth of retailers remains well supported, which helps to explain why the business confidence levels of retailers remain relatively high,” Engelbrecht concluded.  

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