Further deterioration in non-durable goods retail sales during 2012Q3

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Results from the latest Ernst & Young / Bureau for Economic Research (BER) Retail survey reveal that, while trading conditions in general were very challenging during 2012Q3, there were some mixed fortunes within the retail sector. According to Derek Engelbrecht, Retail and Consumer Products Sector leader at Ernst & Young, the survey results indicate that the growth in durable goods and particularly semi-durable goods remained lively during 2012Q3, but non-durable goods sales volumes disappointed.

Official retail sales data released by Statistics South Africa shows that the growth in non-durable goods retail sales volumes (e.g. food, beverages, tobacco, cosmetics and pharmaceuticals) had already slowed from 5.5% year on year (y-o-y) in 2012Q1 to 3.4%      y-o-y in 2012Q2 and the results from the latest Ernst & Young / BER Retail survey suggest that volume growth braked further during 2012Q3.

“The slowdown in non-durable goods sales growth since the first quarter of 2012 can in all likelihood be ascribed to the lacklustre pace of job creation during the first half of 2012 and high – albeit decelerating – food and beverage price increases,” said Engelbrecht. While the price hikes of retailers in food, beverages, tobacco, cosmetics and pharmaceuticals eased from 6.9% y-o-y during 2012Q1 to 6.2% y-o-y in 2012Q2, these price increases were nevertheless still well above those of clothing and footwear retailers (at 2.7% y-o-y in 2012Q2) and retailers in furniture and household appliances (-1.9% y-o-y).  In addition, petrol and grain prices are once again on the rise, which will put added strain on the purchasing power of households and weigh on volume growth going forward.

“Further testimony to the trying business conditions faced by non-durable goods retailers is the fact that the vast majority of the participants in the Ernst & Young / BER Retail survey reported that overall profitability levels slumped during 2012Q3,” said Engelbrecht. The survey results indicate that the rate of increase in non-durable goods selling prices slowed significantly during 2012Q3, but input cost increases remained elevated. Engelbrecht pointed out that “the substantial deterioration in the profitability levels in the non-durable goods retail sector can be ascribed to the unwelcome combination of downward pressure on retail margins and a slowdown in volume growth.”

In sharp contrast, retailers in durable goods (e.g. hardware, paint & glass and furniture & household appliances) and semi-durable goods (e.g. textiles, clothing, footwear, toys and CD’s) reported that the growth in their sales volumes remained lively during 2012Q3. According to retail sales data released by Statistics South Africa, durable goods retail sales volumes increased by 6.1% y-o-y in 2012Q2, while clothing and footwear sales volumes rocketed by 10% y-o-y. “While income growth is fading on the back of a slowdown in both employment growth and real wage increases, durable and semi-durable goods sales are being buoyed by below inflation price hikes, very low interest rates and soaring levels of bank overdrafts, credit cards and other forms of unsecured lending,” Engelbrecht noted. The latest Ernst & Young / BER Retail survey results suggest that durable and semi-durable goods sales growth remained well supported during 2012Q3, and retailers expect volume growth to stay strong during the upcoming festive season.

In all, the survey results suggest that semi-durable goods retailers have seen the largest improvement in the overall profitability levels since the end of 2011. “Not only are clothing and footwear retailers seeing strong volume growth, but they are also able to pass their cost increases on to customers in the form of higher selling prices, thereby preserving their profit margins,” said Engelbrecht. Rapidly rising Chinese wages, a depreciation in the Rand exchange rate and the lagged impact of higher cotton prices have pushed clothing and footwear prices significantly higher over the last year. In sharp contrast to durable and non-durable goods retailers, who indicated that they will implement lower price hikes during the festive season to attract customers, semi-durable goods retailers seem confident that they will be able to increase their selling prices at roughly the same tempo during 2012Q4.

During the third quarter of 2012, the percentage of retailers reporting that they are satisfied with prevailing business conditions improved from a two-year low of 39 to 46 per cent, partially reversing the large fall registered during 2012Q2. In the second quarter, a moderation in retail sales growth, coupled with a substantial escalation in the Eurozone debt crisis and concomitant deterioration in the outlook for global economic growth, saw retailer confidence plunge by 22 percentage points, from 61 to 39. This large drop now appears to be more than what was justified by the slowdown in trade activity, and hence retailer confidence levels recovered somewhat during 2012Q3.

Looking ahead, strong growth in credit card debt, unsecured lending and other overdrafts and loans, coupled with the 50 basis point cut in the prime interest rate to a 37-year low in July, should continue to support retail sales during the festive season. Nevertheless, the growth in retail sales volumes is likely to moderate during the fourth quarter of 2012, as real income growth slows in tandem with weaker global and domestic economic growth.

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