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Clothing and footwear retail sales growth now also losing momentum

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Results from the latest EY / Bureau for Economic Research (BER) Retail survey reveal that the growth in retail sales volumes remained modest during 2013Q3.  However, according to Derek Engelbrecht - Retail and Consumer Products Sector leader at EY, sales performances diverged notably according to type of retailer: "The survey results indicate that, following very poor sales growth during the first half of 2013, hardware sales and sales of non-durable goods such as food, beverages, tobacco products, cosmetics and pharmaceuticals recovered somewhat during the third quarter. In contrast, it appears as though the sales growth of retailers in semi-durable goods such as clothing, footwear, sporting equipment, CDs and toys slowed significantly compared to the surprisingly robust rates recorded in the first half of 2013."

Growth in retail sales volume

Official retail sales data released by Statistics South Africa shows that the growth in total retail sales volumes slowed from 3.8% year-on-year (y-o-y) during the second half of 2012 to 3.1% y-o-y in the first half of 2013. "The results from the latest EY / BER Retail survey suggest that the growth in total retail sales volumes remained around the 3% y-o-y mark during 2013Q3, very much in line with retailers' earlier expectations," said Engelbrecht.

However, there have been some mixed fortunes within the retail sector in recent months. According to Statistics South Africa, non-durable goods sales volumes grew by only 1.9% y-o-y during 2013H1, while the sales volumes of retailers in durable goods (e.g. hardware, furniture, household appliances and electronic goods) expanded by a mere 0.8% y-o-y. The 2013Q3 EY / BER Retail survey results indicate that the growth in hardware sales and non-durable goods sales volumes improved slightly during the third quarter compared to the very weak growth witnessed during the first half of 2013.

Engelbrecht noted that "Non-durable goods sales volumes may have been supported by the fact that most non-durable goods retailers did not hike their selling prices in line with the high increases in their inputs costs. Downward pressure on margins continue to erode the overall profitability levels of non-durable goods retailers and manufacturers."

Whereas non-durable goods retailers were still able to keep their selling price increases in check, soaring input costs forced retailers in durable and semi-durable goods to implement significant price hikes during 2013Q3. Retailers in durable and semi-durable goods reported that the rate of increase in their input costs is now the highest it has been in five years. Durable and semi-durable goods have a high import content, and the input costs of these retailers are therefore closely tied to the Rand exchange rate. Trading around R10,20 to the US dollar, the Rand has depreciated by more than 30% over the last 18 months, putting substantial upward pressure on the cost of imported goods such as household appliances, electronic goods, sporting equipment, toys, CD's, and clothing & footwear. "It appears that rising prices, coupled with a deterioration in income and credit growth, are finally starting to take a toll on semi-durable goods retail sales, while the growth in furniture and household appliances remains weak," said Engelbrecht.

Trading conditions remained challenging in the retail sector during 2013Q3, but there has also been some positive news. Despite a slew of negative developments on the economic front (e.g. industrial action in the mining and vehicle manufacturing sectors, soaring petrol prices, suggestions that the growth in unsecured lending is coming off the boil and a continuing  depreciation in the Rand exchange rate), most retailers indicated that sales volumes grew in line with their earlier expectations and did not slow further from the 3% y-o-y pace recorded during the first half of 2013. Retailers have also not reported an involuntary build-up of stocks, which would typically be indicative of a sharp or unexpected deterioration in consumer demand.

Furthermore, retailer confidence levels actually recovered some lost ground during the third quarter. The number of retailers reporting that they are satisfied with prevailing business conditions fell from 50% in 2013Q1 to 41% in 2013Q2, but rebounded to 49% in 2013Q3, mainly due to an improvement in non-durable goods sales. With an index number of 49, the retailer confidence index is currently equal to its long-run average reading (since 1994). However, retailer confidence levels remain well below the average reading of 62 registered over the last decade.

Looking ahead, most retailers will probably not find this festive season to be particularly jovial. Although some retailers may see positive base effects (given that retail sales volumes really disappointed during 2012Q4 with growth of only 2.4% y-o-y), factors such as record high fuel prices and soaring import prices, rising food inflation, a deterioration in job creation prospects and slower growth in government spending will likely continue to weigh down income and credit growth - and hence the growth in retail sales volumes - during the final quarter of 2013.

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