Retail sales growth remained subdued during 2013Q2

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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 remained fairly subdued during 2013Q2.  However, according to Derek Engelbrecht - Retail and Consumer Products Sector leader at Ernst & Young - there were (with) some mixed fortunes within the retail sector: "The survey results indicate that clothing and footwear sales volumes remained sturdy, but sales of furniture and household appliances and non-durable goods such as food, beverages, tobacco products and cosmetics disappointed during the second quarter."

Official retail sales data released by Statistics South Africa shows that the growth in total retail sales volumes slumped from 5.3% year on year (y-o-y) during 2012Q3 to 2.4% y-o-y in 2012Q4, but improved slightly to 3.0% y-o-y during 2013Q1. The fact that the Easter weekend  - the second most important trading period after Christmas for many retailers - mainly fell in March this year (as opposed to April) in all likelihood contributed to the slight improvement in retail sales growth during 2013Q1 relative to 2012Q4.

According to Statistics South Africa, retailers in textiles, clothing, footwear and leather goods saw by far the strongest sales growth during 2013Q1, with volume growth of 7.5% y-o-y. In sharp contrast, the sales volumes of retailers in durable goods (e.g. hardware, furniture, household appliances and electronic goods) contracted by 0.8% y-o-y during 2013Q1, while non-durable goods sales (e.g. food, beverages, tobacco products, cosmetics and pharmaceutical products) grew by only 1.9% y-o-y.

The results from the latest Ernst & Young / BER Retail (2013Q2) survey suggest that clothing and footwear sales volumes continued to outperform during 2013Q2, while (2013Q2 survey suggets) non-durable and durable goods sales growth (particularly in the furniture and household appliances category) remained weak.

Engelbrecht noted that “The deterioration in retail sales growth since mid-2012 can in all likelihood be ascribed to a slowdown in real income growth on the back of poor job creation and rising inflation, coupled with a deceleration in the pace of unsecured lending and a substantial drop in consumer confidence levels.” During 2013Q1, the FNB/BER consumer confidence index slumped to a 9-year low of -7 index points (from +5 in 2012Q1), with consumers turning particularly pessimistic about the appropriateness of the present time to buy durable goods. Apart from the moderation in income growth and household credit extension, increasing levels of social unrest and the concomitant deterioration in the outlook for the South African economy, as well as higher prices for imported durable goods (on the back of a sharp depreciation in the Rand exchange rate) are in all likelihood persuading many consumers to postpone their durable goods purchases.

"Non-durable goods sales volumes, in turn, are being waylaid by muted employment growth and higher prices for essentials such as food, transport and electricity," said Engelbrecht. Despite the 73 cents decline in the petrol price in May 2013, the price of petrol was 21% higher on average during April/May 2013 compared to January 2012.

Retailer confidence levels deteriorated further during the second quarter. The % of retailers reporting that they are satisfied with prevailing business conditions fell from 50 % in 2013Q1 to 41 % in 2013Q2, mainly due to weak sales growth and low profitability levels among durable and non-durable goods retailers.

Engelbrecht pointed out that, "While the findings from the latest Ernst & Young / BER Retail survey suggest that trading conditions remained challenging in the retail sector during 2013Q2, the results could have been worse. We did not see an involuntary build-up of stocks in the retail sector that is typically indicative of a sharp or unexpected deterioration in consumer demand.  In fact, most retailers indicated that sales volumes grew in line with their earlier expectations and did not slow substantially from the 3% y-o-y recorded during 2013Q1. Furthermore, most retailers anticipate a slight improvement in trading conditions during the third quarter."

Another striking feature of the latest survey results is the fact that, despite a dramatic depreciation in the Rand exchange rate in recent months, the survey respondents reported that the rate of increase in their input costs eased for the 2nd consecutive quarter. "This alleviated some of the downward pressure on profitability, as retailers continued to hike their selling prices at a sturdy pace," said Engelbrecht. However, most retailers expect lower increases in their selling prices during 2013Q3, which will bring some welcome respite for consumers.

Nevertheless, whereas the growth in household consumption expenditure was the mainstay behind the domestic economic recovery since the recession, The growth in consumer spending is expected to be subdued and much less supportive of  economic growth during the remainder of 2013. Both real income growth and credit extension are expected to slow further on the back of weak global economic growth and the debilitating impact of seemingly relentless social unrest and industrial action, high household debt levels and deteriorating business and consumer confidence levels on the domestic front.               

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