Retail sales growth disappoints during 2013Q1

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Results from the latest Ernst & Young / Bureau for Economic Research (BER) Retail survey reveal that trading conditions continued to deteriorate and the growth in retail sales volumes slowed further during 2013Q1.  According to Derek Engelbrecht, Retail and Consumer Products Sector leader at Ernst & Young, the survey results indicate that non-durable goods sales volumes (e.g. food, beverages, tobacco, cosmetics and pharmaceutical products) were particularly disappointing, while sales growth in the semi-durable goods retail trade (e.g. clothing, footwear, toys and CDs) also waned. 

Official retail sales data released by Statistics South Africa shows that the growth in total retail sales volumes had already slumped from 5.3% year on year (y-o-y) during 2012Q3 to 2.4% y-o-y in 2012Q4 and braked further to only 1.9% y-o-y in January 2013. The results from the latest Ernst & Young / BER Retail survey suggest that volume growth remained weak during the remainder of the first quarter, with non-durable goods sales in particular now under severe downward pressure. According to Statistics South Africa, the growth in retail sales volumes of specialised food, beverage and tobacco stores and retailers in cosmetics, toiletries and pharmaceutical products slowed from 4.4% y-o-y in 2012Q3 to 2.6% in 2012Q4, while sales volumes contracted by 3.3% y-o-y in January 2013.

 “The slowdown in non-durable goods sales growth since mid 2012 can in all likelihood be ascribed to the lacklustre pace of job creation during the second half of 2012 and soaring food, fuel and electricity prices,” said Engelbrecht. According to the Quarterly Labour Force Survey by Statistics South Africa, 68 000 jobs were destroyed during 2012Q4, seeing total employment growth slowing to only 0.6% y-o-y. In addition, the petrol price surged by R2,36 per litre (or 22.5%) - from R10,47 per litre (of unleaded petrol at the coast) in July 2012 to an all time high of R12,83 per litre in April 2013. Food inflation, in turn, accelerated from 5.0% in August to peak at 7.4% in November 2012.

Higher prices for essentials such as food, transport and electricity put added strain on the purchasing power of households, particularly among the lower income groups that spend a large proportion of their monthly disposal income on non-durable goods. A slowdown in unsecured lending has in all likelihood now also started to weigh on the finances of lower and middle income consumers, providing less stimulus to the retail sector.

On a more positive note, the results from the Ernst & Young / BER Retail survey suggest that the rate of increase in non-durable goods selling prices (and input costs) slowed during 2013Q1. This corresponds with the latest inflation numbers from Statistics South Africa, which show that food inflation eased from 7.4% in November 2012 to 6.3% in February 2013. "Unfortunately, this is likely only a temporary respite for consumers, as a weaker exchange rate, substantially higher transport costs and rapidly rising grain, meat and vegetable prices are expected to push food price increases above the 10% mark by mid 2013. Apart from price hikes, factors such as muted job creation and slower growth in social grants expenditure will keep a firm lid on the growth in non-durable goods sales volumes during the remainder of 2013," said Engelbrecht.

The growth in semi-durable goods sales volumes remained significantly stronger compared to that of non-durable goods during 2013Q1, but retailers were nevertheless disappointed by the fact that volume growth slowed relative to the 2012 festive season. Engelbrecht noted that "The vast majority of semi-durable goods retailers reported a deterioration in trading conditions and lower overall profitability levels. Fuelled by the sharp depreciation in the Rand exchange rate over the last year, import prices of clothing, footwear, toys and CDs soared, putting downward pressure on the profit margins of semi-durable goods retailers. This happened as weaker demand prevented retailers from hiking their selling prices enough to pass on their higher input costs to consumers." 

Following relatively disappointing sales growth over the festive season, the results from the latest Ernst & Young / BER Retail survey suggest that durable goods sales volumes (e.g. hardware, furniture, household appliances and electronic goods) recovered somewhat during 2013Q1. Engelbrecht pointed out that "The slight uptick in durable goods sales volumes may well reflect some pre-emptive buying by consumers in anticipation of further price hikes in the wake of the depreciating exchange rate. However, the resilience of durable goods sales volumes, compared to faltering non-durable goods sales, also points towards less financial strain on high income households compared to low income families."

In all, the percentage of retailers reporting that they are satisfied with prevailing business conditions deteriorated from 54 per cent during 2012Q4 to 50 per cent in 2013Q1, mainly due slower sales growth and lower profitability levels among non-durable and semi-durable goods retailers.

Looking ahead, the growth in retail sales volumes is likely to remain subdued over the next 6 months, as both real income growth and credit extension is expected to slow on the back of weak global economic growth and poor job creation prospects domestically. Engelbrecht noted that rising retail selling prices will further erode the growth in retail sales volumes, but may counter some of the adverse impact of slower volume growth on retail turnovers.
                     
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