Retailers gear up for better festive season sales…

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Growth in 2013Q4 sales volumes could be higher compared to Christmas 2012

Results from the latest EY / Bureau for Economic Research (BER) festive season retail survey suggest that retail sales growth accelerated slightly during the fourth quarter of 2013 relative to 2013Q3. The majority of retailers surveyed also reported better sales growth compared to the 2012 festive season, when volume growth slumped to only 2.3% year-on-year (y-o-y).

According to Derek Engelbrecht, Retail and Consumer Products Sector leader at EY, “Furniture and household appliances retailers, the sector that has arguably been hardest hit by the slowdown in unsecured lending, indicated that sales volumes remained disappointingly low in the run-up to Christmas. However, sales of hardware products and semi-durable goods such as clothing, footwear, sporting equipment, CDs and toys remained healthy, while sales of non-durable goods such as food, beverages, groceries and cosmetics appear to be recovering from the low levels recorded earlier in the year."

BER retail graph Q4 13

 Source: BER / Statistics South Africa 

Official retail sales data released by Statistics South Africa shows that the growth in retail sales volumes exceeded 7% y-o-y during 2010Q4 and in 2011Q4 (see graph), but weakened throughout 2012 and dropped sharply between 2012Q3 (5% y-o-y) and 2012Q4 (2.3%).

 "The results from the latest EY / BER retail survey suggest that sales growth will be less buoyant compared to the robust rates recorded during the 2010 and 2011 festive seasons, but the growth in retail sales volumes should top the rather weak number recorded last Christmas," said Engelbrecht.

Given positive base effects (i.e. the comparison with relatively poor 2012Q4 retail sales), volume growth may well accelerate from 2.1% y-o-y in 2013Q3 to closer to 3% during 2013Q4.

According to Statistics South Africa, clothing & footwear retailers and retailers in hardware, paint & glass were by far the best performers during the previous quarter, with volume growth of 7.4% and 6.1% y-o-y respectively in 2013Q3. The results from the EY / BER festive season retail survey indicate that volume growth in both these categories remained sturdy during 2013Q4.

Engelbrecht noted that "Hardware retailers in particular appear to be limiting their price hikes, in the face of severe upward pressure on input costs, in order to bolster volume growth. This sector is also deriving some benefit from the gradual recovery in the building and construction sector." Although the growth in semi-durable goods sales volumes remain strong, rapidly rising input costs on the back of a dramatic depreciation in the Rand exchange rate over the last two years have eroded profitability levels.

In sharp contrast to the solid growth recorded by hardware and semi-durable goods retailers, official statistics show that the growth in non-durable goods sales volumes slowed from 3.8% y-o-y in 2012 to only 0.4% y-o-y in 2013Q3.

However, EY / BER Retail survey results suggest that volume growth improved notably in the run-up to the 2013 festive season. Engelbrecht pointed out that "The recent uptick in employment, higher wage settlements and a welcome decline in the petrol price since September 2013 are in all likelihood boosting disposable incomes and alleviating some of the downward pressure on the non-durable goods sector."

According to the Quarterly Labour Force Survey by Statistics South Africa, total employment increased (rather unexpectedly) by 308 000 workers (or 2.8% y-o-y) during 2013Q3, which saw the unemployment rate decline from 25,6% to 24,7%. Furthermore, by November, the price of petrol had declined by 3.9% (to R 13,02 /litre for 95 unleaded petrol in Gauteng) from its August 2013 peak of R 13,55 /litre.

Wounded by a substantial deceleration in unsecured lending and a sharp decline in consumer confidence levels, furniture and household appliances retailers have had a miserable run so far this year.  Official retail sales data by Statistics South Africa shows that the growth in furniture and hardware sales plunged from 5.1% in 2012 to -2.8% y-o-y in the first half of 2013 and -4.7% y-o-y in 2013Q3. EY / BER Retail survey results suggest that sales volumes continued to contract and overall profitability levels remained extremely poor during 2013Q4. The slump in durable goods sales growth agrees with the latest (2013Q4) findings from the FNB/BER Consumer Confidence Survey, which show that the majority of South Africans across all income and population groups regard the present as an inappropriate time to purchase durable goods.

To be sure, trading conditions remained very challenging during 2013Q4, with only 40% of respondents reporting that they are satisfied with prevailing business conditions in the retail sector (down from 49% in 2013Q3 and 54% in 2012Q4). "With the exception of furniture and household appliances retailers, most retailers surveyed by EY/ BER reported better sales volumes in the run-up to Christmas compared to the 2012 festive season. Retailers remain cautiously optimistic that input cost pressures will ease, selling price increases will slow and volume growth will continue to mend during 2014Q1," said Engelbrecht.

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