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No festive cheer for retailers

| Economic factors

Despite the anticipated boost from local retailers jumping on the Black Friday bandwagon, retail tills have yet to start jingling this festive season, a new survey has found.

The latest EY/Bureau for Economic Research (BER) Retail Survey suggests business conditions in the retail sector continue to deteriorate during the last quarter of the year.

The last quarter, which incorporates the all-important festive season, is usually a boon for retailers as people stock up on gifts and prepare for the holidays.

However, the economy has been under severe strain and consumers have been hard hit by rising inflation, food prices, and the cost of credit as the Reserve Bank increases the prime lending rate from 9.5 percent to 9.75 percent.

The survey notes most of the retailers it spoke to - across durable goods, non-durable good and semi-durables goods - noted growth in their sales volumes was significantly lower in the run-up to Christmas compared to the 2014 festive season, despite their efforts to contain selling price inflation.

According to Statistics South Africa, the growth in retail sales volumes improved gradually from 1.4 percent year on year in the second quarter of 2014 to 2.3 percent year on year in the fourth quarter of last year and up to 3.3 percent in the third quarter of this year.

EY says this recovery was driven by receding inflation - largely on the back of sharply lower fuel prices and a deceleration in food inflation - and a recovery in strike-affected incomes following the industrial action that wreaked havoc in the platinum belt in the first half of last year.

Slowing sales

However, results from the latest EY/BER Retail Survey suggest that - notwithstanding competitive pricing in the face of rising input costs during the last quarter of the year - volume growth fell well short of retailers' third quarter expectations and slowed significantly compared to the 3.3 percent year-on-year rate recorded during the third quarter.

Derek Engelbrecht, Consumer Products & Retail sector leader at EY, notes a “barrage of negative developments has been weighing on the spending power of consumers since the beginning of the year, including job losses, tighter credit conditions, higher personal income tax and indirect taxes, slower growth in government wages and social grants expenditure, a dramatic depreciation in the rand exchange rate and the pedestrian performance of stock prices on the JSE, as well as rising interest rates.

“Faced with a deterioration in consumer demand, many retailers were forced to keep a tight lid on their selling prices - despite rising input costs - in order to attract customers and prevent an involuntary build-up of stocks. While this helped to prop up retail volume growth until the third quarter of 2015, the growth in the value of retail sales has actually been slowing since the second half of 2014."

Inflation

According to Statistics South Africa, retail price inflation slumped from 5.8 percent year-on-year in the third quarter of last year to just 3.7 percent a year later (despite a 20 percent depreciation in the rand exchange rate against the US dollar over the same period), while retail value (or turnover) growth moderated from 8.1 percent year-on-year to 7.2 percent over the same period - and only 6.5 percent year-on-year in September 2015.

Given the slump in the rand exchange rate and a projected increase in food and fuel prices, consumer inflation is set rise noticeably in coming months, adds EY. “This will in all likelihood translate into even slower growth in retail sales volumes during the first half of 2016,” says Engelbrecht.

Engelbrecht notes "the slowdown in retail sales growth appears to be broad-based, with retailers in durable, semi-durable and non-durable goods all reporting a deterioration in sales growth.

“The only exception appears to be hardware retailers, where a modest recovery in building activity and home renovations continues to support hardware, paint and glass sales volumes. Nevertheless, hardware sales growth has also braked relative to the first half of 2015, when frequent load-shedding led to a surge in the demand for products that could be utilised during power outages."

Despite competitive pricing, lower fuel prices and the respite from load-shedding, retail sales volumes have disappointed in the run-up to Christmas, says Engelbrecht.

“Given very low consumer confidence levels and increased pressure on the financial positions of many households, consumers will likely favour practical gifts and perceived value for money purchases at the expense of big-ticket items and extravagant expenses during the 2015 festive season. With retail prices set to increase from their current low levels - adding to the flood of adverse economic developments already weighing on household income growth - most retailers expect volume growth to slow further into the New Year."


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