Sales growth slump dents retailer confidence
Cape Town - Results from the latest EY/Bureau for Economic Research (BER) Retail Survey signal a substantial deterioration in trading conditions in the retail sector during the third quarter of 2015.
The majority of the retailers surveyed by the BER in all three sub-categories - durable goods, non-durable goods and semi-durable goods - reported a marked slowdown in sales growth and a slump in overall profitability levels during the third quarter.
According to Statistics SA, the growth in retail sales volumes improved gradually from just below 2% year-on-year (y/y) during the first half of 2014 to 3.1% y/y in the second quarter of 2015, largely on the back of receding inflation and a recovery in strike-affected incomes following the prolonged platinum sector strike in the first half of 2014.
However, results from the EY/BER Retail Survey suggest that volume growth slumped back down to around 2% y/y during the third quarter of 2015.
Derek Engelbrecht, consumer products and retail sector leader at EY, said a confluence of adverse economic developments has been putting renewed downward pressure on household spending power. This includes higher personal income tax and indirect taxes, job losses, significantly lower growth in government wages and social grants expenditure, rising inflation and interest rates, a sharp depreciation in the rand exchange rate and the slump in stock prices on the JSE.
Some of these factors already contributed to a dramatic decline in consumer confidence levels in the second quarter of 2015, but retail sales growth still held up relatively well.
"Unfortunately, the latest EY/BER Retail Survey results suggest that the retail sector has now also capitulated, with most retailers reporting a broad-based slowdown in volume growth and a marked deterioration in profitability levels during the third quarter of 2015," said Engelbrecht.
Even hardware retailers - who recorded strong sales growth during the first half of 2015 on the back of surging demand for products that could be used during load shedding - reported a marked deceleration in sales growth in the third quarter of 2015.
Looking at input costs and selling prices, the majority of retailers reported that input costs escalated at a faster rate than their selling prices. Given the high import content of durable and semi-durable goods, these categories are particularly vulnerable to the inflationary effect of the sharp drop in the rand exchange rate in recent months.
"Given rising interest rates, tougher credit requirements for lenders and a dramatic decline in consumer confidence levels - signalling a greater reluctance to spend, particularly on discretionary items - we expect to see a significant deceleration in durable and semi-durable goods volume growth in coming quarters," said Engelbrecht.
"The broad-based deterioration in trading conditions during the third quarter of 2015 dealt a further hefty blow to business confidence levels in the retail sector. Only 34% of the retailers surveyed by the BER indicated that they were satisfied with prevailing business conditions in the third quarter of 2015, sharply down from 60% in the first quarter of 2015 and 52% in the second quarter of 2015."
Survey results suggest sales volume growth slowed more than retailers had expected, notwithstanding their efforts to contain price hikes by cutting profit margins.
"With selling prices now set to increase in the fourth quarter - adding to the strong headwinds already battering the South African consumer - most retailers expect weak volume growth during the festive season," said Engelbrecht.