Retail sales not so merry this festive season...

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Results from the latest Ernst & Young / Bureau for Economic Research (BER) festive season retail survey reveal that trading conditions remained challenging in the retail sector during 2012Q4, with the majority of retailers surveyed reporting slower sales growth compared to the 2011 festive season. However, according to Derek Engelbrecht, Retail and Consumer Products Sector leader at Ernst & Young, “There were some mixed fortunes within the retail sector. The survey results indicate that sales of furniture and household appliances really disappointed during the fourth quarter, but most retailers in clothing and footwear and food, beverages, tobacco, groceries and cosmetics still recorded satisfactory sales growth."

Official retail sales data released by Statistics South Africa show that the growth in retail sales volumes topped 7% year on year (y-o-y) during 2010Q4 and in 2011Q4, but growth slowed throughout 2012 to 4.6% y-o-y in 2012Q3. The results from the latest Ernst & Young / BER retail survey indicate that volume growth came in well below the robust growth rates recorded during the 2010 and 2011 festive seasons (see graph below), and the latest index number points to volume growth of between 3.5% and 4.5% during 2012Q4.

Q4 BER retail sales colume versus actual sales growth

Source: BER / Statistics South Africa

According to Statistics South Africa, clothing and footwear retailers were the top performers during the previous quarter, with volume growth of 9.7% y-o-y in 2012Q3. The results from the Ernst & Young / BER festive season retail survey indicate that the volume growth of semi-durable goods such as clothing, footwear, toys and CDs continued to outperform sales of durable goods (e.g. hardware, furniture, household appliances and electronic goods) and non-durable goods (e.g. food, beverages, cosmetics and pharmaceutical products). Engelbrecht said that, “Although disposable income growth has been suppressed by slower wage growth, rising household tax burdens and soaring petrol and electricity prices, semi-durable goods sales have been bolstered by below inflation price hikes, very low interest rates and soaring levels of bank overdrafts, credit cards and other forms of unsecured lending.” However, it does appear as though the rate of growth in semi-durables goods sales volumes has now also started to slow from the impressive 10% y-o-y increases recorded since March 2012, and semi-durable goods retailers expect volume growth to ease further into 2013.

In sharp contrast to the solid growth recorded by semi-durable goods retailers, official statistics show that the growth in non-durable goods sales volumes slowed from around 5% y-o-y during 2011Q4 to only 3% y-o-y in 2012Q3. However, Ernst & Young / BER Retail survey results suggest that, while volume growth still fell well short of the sturdy rates recorded during the 2011 festive season, there was nevertheless an improvement compared to the third quarter of 2012. "To be sure, high fuel prices and rising food prices are still eroding the purchasing power of households, but the recent increase in employment has been very positive for the non-durable goods sector," said Engelbrecht. According to the Quarterly Labour Force Survey by Statistics South Africa, total employment increased by an impressive 198 000 during 2012Q3, following a substantial deceleration in the pace of job creation during the first half of 2012. "However, given the adverse implications of the violent strikes in the mining, transport and now also agricultural sectors for fixed investment and job creation in South Africa, the rate of employment growth will likely slow meaningfully during the first half of 2013. Coupled with rapidly rising food inflation and the projected moderation in the roll-out of social grants to poor households, this does not bode well for volume growth in the non-durable goods retail trade next year," Engelbrecht noted.

According to retail sales data from Statistics South Africa, durable goods retailers recorded robust volume growth of 10.4% y-o-y during the final quarter of 2011, but volume growth slowed significantly to only 4.1% y-o-y in 2012Q3. The Ernst & Young / BER festive season retail survey results suggest that volume growth moderated further during 2012Q4, with sales of furniture and household appliances in particular underperforming. The recent deterioration in durable goods sales growth agrees with the latest (2012Q3) findings from the FNB/BER Consumer Confidence Survey, which shows that the majority of South Africans do not regard the present as an appropriate time to purchase durable goods.

Another striking feature of the Ernst & Young / BER festive season retail survey results is the escalation in the rate at which input costs – and retail selling prices – are increasing. The rate of increase in the Consumer Price Index (CPI) slowed from 6.3% in January 2012 to 4.9% in July 2012, before edging back up to 5.6% in October on the back of higher food and petrol prices. The latest survey results show that selling prices and, in particular, input costs, increased at a significantly higher rate during the fourth quarter compared to the third quarter of 2012. According to Engelbrecht, a weaker Rand exchange rate is putting upward pressure on the prices of imported durable goods such as household appliances and electronic goods, while higher fuel, grain and meat prices and a substantial increase in excise duties on spirits and beer are driving up non-durable goods prices. Retailers expect durable and semi-durable goods price increases to remain elevated during 2013Q1, while non-durable goods retailers anticipate even higher increases in their selling prices early in the New Year.

In all, the percentage of retailers reporting that they are satisfied with prevailing business conditions improved from 46 per cent during 2012Q3 to 54 per cent in 2012Q4. The uptick in retailer confidence during the third and the fourth quarters partially reverses the large fall registered during 2012Q2 (when a substantial escalation in the Euro zone debt crisis wounded confidence levels), but confidence levels remain lower compared to the levels that prevailed during the 2011 festive season (56) and in 2012Q1 (61).

Looking ahead, the growth in retail sales volumes is likely to moderate further during the first half of 2013, as both real income growth and credit extension is expected to slow on the back of weaker global economic growth and the debilitating impact of widespread industrial action on the domestic front. However, Engelbrecht pointed out that higher retail selling prices could counter some of the adverse impact of slower volume growth on retail turnovers.

About the Ernst & Young Festive Season Retail Trends Survey

The Bureau of Economic Research’s business surveys are conducted quarterly. The BER's panel for the retail sector consists of 393 retailers and is broadly representative of the formal retail sector, taking into account the response rate and the results from a comparison between the composition of the survey panel and census and other official data. The fourth quarter survey took place between 18 October and 12 November 2010.

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