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Retail firms to feel the heat

| Economic factors

Analysts expect the retail sector to be under pressure, with possible job cuts on the horizon, after the Reserve Bank raised interest rates last week.

The rate hike comes amid higher power and food inflation costs, and as the economy is expected to shrink to 0.7 percent.

Brian Pyle, an industrial fund manager at Old Mutual, said retail companies would be in turmoil. “Retail companies that are likely to be impacted by the latest interest rate increase have a few options when it comes to mitigating the burden that this move will have on their consumers and their businesses,” Pyle said, adding that decisive cost management was the key.

“Unfortunately, this could include retrenchments, which further exacerbates the problem. They could also try to win more market share by being more attractive than the competition, with better product, service and convenience, as well as continuously reinventing themselves.

“Maintaining balance sheet strength is also important so as to avoid the double blow of negative operational and financial leverage.”

Alec Abraham, an equity analyst with Sasfin Securities, said the interest rate hike was adding to the combination of shirking household disposable incomes and expectations of higher inflation. “All these are a poisonous cocktail for retail sales,” said Abraham.

Abraham said he expected that food retailers were likely to grow their house brands. Clothing retailers would produce cheaper merchandise to cushion against the impact of the sky-high repo rate.

“Out of the retailer sector, clothing and footwear are in a sweet spot. They will be able to simplify their products through things like cutting down on embellishments to make cheaper garments and using cheaper materials.”

However, furniture retailers would be negatively affected. “Consumers can put off buying lounge suites for three years,” Abraham added.

However, Foschini Group chief financial officer Anthony Thunström holds a more positive view than analysts. He said on Friday that the Reserve Bank’s decision to hike the repo rate was not significant enough to squeeze the retail sector.

“We have been through interest rate hikes before. If in a period of 12 months there was a 2 percent increase we would be concerned. A half-a percent increase in rates like yesterday (Thursday) will have little or no effect at all. A lot of merchandise by retailers is imported and the upside is that the exchange rate strengthened on news of the rate,” said Thunström.

He also said cutting down on the cost of producing garments was not a solution.

“Consumers want quality. The two ways of cutting costs are how you source your products and where you source your products.”

Retailers, like Edcon that has been battling to reduce its debt, may now find consumers unable to meet their debt obligations.

Edcon, the retail group which owns fashion chains including Edgars, Jet and Legit, has said credit sales contribute 42 percent of total sales down from 46.5 percent previously.

Ian Wason, the chief executive at Debt Busters, said the interest rate hike meant consumers would not have room to meet their debt obligations.

“This does not bode well for South African consumers, as the Reserve Bank’s decision to increase interest rates means that they will be paying even more toward their debt. Consumers were already struggling with their debt before this announcement… There is no more wiggle room left for South Africans that live on credit,” said Wason.

He noted that the latest Consumer Bureau Monitor report released by the National Credit Regulator said nearly 54 percent credit-active consumers were experiencing financial problems with their accounts.

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