Retail sales growth still under pressure
Johannesburg, 24 June
Results from the latest EY / Bureau for Economic Research (BER) retail survey suggest that retail sales growth remained fairly weak during the second quarter of 20141. According to Statistics South Africa, retail sales volumes grew by an average annual rate of only 2.8% year-on-year (y-o-y) between January 2013 and March 2014, down from 6.1% in 2011 and 4.7% in 2012. The results from the latest EY / BER Retail Survey point to retail volume growth of between 2% and 3% during 2014Q2.
According to Derek Engelbrecht, Retail and Consumer Products Sector leader at EY, the deterioration in retail sales growth since the second half of 2012 can be ascribed to a dramatic slowdown in unsecured credit extension, waning real disposable income growth on the back of weak employment growth and rising inflation, soaring fuel prices and a sharp decline in consumer confidence levels. Given the sensitivity of the demand for durable goods to the availability of credit (coupled with the impact of the dramatic depreciation in the
Rand exchange rate on the prices of imported durable goods), it is not surprising that retailers in furniture and household appliances suffered the largest slowdown in sales growth over the last 2 years. However, following an outright contraction of 4.8% y-o-y in sales volumes during 2013, the latest EY/BER survey results suggest that furniture and household appliances sales volumes may have bottomed during the first half of 2014. The majority of retailers expect a slight improvement in furniture and household appliances sales volumes during 2014Q3, albeit compared to the weak levels recorded in 2013.
In contrast to furniture retailers, hardware, paint and glass retailers reported robust growth during 2013, supported by an uptick in residential building activity. However, Engelbrecht noted that "Tighter mortgage loan lending criteria following the South African Reserve Bank’s hike in the interest rate in January, and subsequent warnings that more increases are to follow, now appear to be denting the recovery in the building sector. This may translate into a slowdown in hardware sales growth in coming months."
Apart from hardware, paint and glass retailers, clothing and footwear retailers were the only other retail sales category to report sustained strong growth in sales volumes during 2013 and in 2014Q1 (exceeding 7% per annum). However, the 2014Q2 EY/BER survey results indicate that the growth in semi-durable goods sales (e.g. clothing, footwear, sporting equipment, CDs and toys) is now also coming off the boil. Credit sales in particular appear to be under pressure from the slump in unsecured lending (and generally high debt levels of lower- and middle-income consumers), whilst the sustained weakness of the Rand exchange rate has started to put upward pressure on the input costs of semi-durable goods retailers with a high import content.
Wounded by insufficient job creation, lost income due to strikes, slower growth in social grants expenditure and rapidly rising food and fuel prices, the growth in non-durable goods sales volumes (e.g. food, beverages, tobacco products, cosmetics and pharmaceuticals) also deteriorated notably over the last year. However, similar to the furniture and household appliances sector, there appears to be some light at the end of the tunnel for non-durable goods retailers. "To be sure, the growth in non-durable goods sales volumes remained sub-par during 2014Q2. However, most retailers reported that their sales volumes beat their earlier projections - albeit that these expectations were quite pessimistic - and non-durable goods retailers anticipate a slight improvement in sales volumes during 2014Q3, " said Engelbrecht. The 37 cent decline in the petrol price between April and June 2014 would have bolstered the purchasing power of households, and at the same time also eased input cost pressures for retailers.
In fact, retailers across all sectors reported a welcome moderation in input cost and selling price pressures from the 5-year highs reached during 2014Q1. Most retailers expect price pressure to ease further in 2014Q3. This should be positive for volume growth, but a potentially larger pass-through of the exchange rate depreciation down the line and rising real wage increases still hold some upside risk to the inflation outlook.
Although trading conditions remained very challenging during 2014Q2, the situation could have been worse given the overall economic impact of the prolonged strike in the mining sector (and concomitant contraction in manufacturing activity) and ever-present electricity supply constraints. Rather than a further substantial deterioration in retail sales growth in 2014Q2, the results from the latest EY/BER retail survey point to another quarter of modest growth in retail sales volumes. The business confidence levels of retailers recovered from 39 to 49 index points during 2014Q2, suggesting that roughly half of the retailers surveyed by the BER reported that they are satisfied with prevailing business conditions in the trade sector2. The fact that retail sales volumes did not contract (following the fall in overall economic growth in the previous quarter, and in contrast to retailers' earlier bleak expectations), coupled with a slight improvement in profitability on the back of cost cutting measures, may have bolstered retailer confidence. "Nevertheless, given poor job creation prospects, low consumer confidence levels, a moderation in government spending, rising interest rates and the slowdown in household credit extension - not to mention the adverse impact of relentless industrial action on household budgets - it may take at least another year before real retail sales growth breaks out above its current pedestrian pace of 2 to 3% per annum," said Engelbrecht.
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1The fieldwork of the first quarter survey was conducted between 5 May and 2 June 2014.
2At 49 index points in 2014Q2, the business confidence levels of retailers are now once again higher compared to that of the manufacturers (25), new vehicle dealers (43), wholesalers (44) and building contractors (45) surveyed by the BER. It is heartening that the retail sector is still making a positive contribution to overall economic growth in the face of all the headwinds to consumer spending, but the deterioration in the outlook for the rest of the economy (e.g. mining, manufacturing and construction in particular) during the first half of 2014 holds adverse implications for household income growth for the rest of the year. While retail sales growth has already slowed notably and the bottom may indeed be near, the recovery is likely to be more sluggish than previously anticipated.