Challenged retail sector to be hit by downgrade
By Lameez Omarjee - Apr 13th, 15:42
South African retailers saw the weakest growth in seven years in 2016, mainly due to poor economic growth and recent political events may make it harder to achieve projected economic growth of 1.2%, research by EY revealed.
According to EY’s report on South Africa’s retail sector for 2016, the retail environment was also impacted regulatory and political pressures, low credit growth, low investment levels and the drought which impacted economic growth.
The EY analysis surveys the 12 largest retailers in South Africa, which account for nearly R600 bn in annual sales. It focused on grocers, speciality and clothing categories.
Return on Equity (ROE) for speciality retailers were at 51.6%. Clothing retailers averaged at 41.1% and grocery retailers at 22.3%, despite having the majority (62%) of spend.
Speciality retailers have a 23% share in spend, and clothing retailers 15%.
Subsequently, grocery retailers have a 66% share in profits, followed by speciality with 18% and clothing at 16%.
Research showed that sales recovered in the fourth quarter of 2016, but that the sector remains “fragile” and the outlook remains “sombre” given poor economic growth.
The food and pharmacy sectors appear to have rising margins, but that of clothing seems to be struggling due to the saturated nature of the sector. Grocers often outperform other sectors especially in weak economic environments, the research explained.
Headline earnings for grocers were up 25.7%, that of speciality retailers was up 8.7% and clothing was down 47.6%.
Overall, rising inflation, slow volume in growth of sales impact margins and returns for retailers. Further, marginal store growth also has a bearing on profitability as new shopping centres impact trading density, EY explained.
Growth in the continent slowed to a “two-decade” low in 2016, forcing retailers to look at opportunities globally. Truworths, Spar and The Foschini Group (TFG) are looking to expand to Europe and the UK.
Turnover from the rest of the world (23.5%) is higher than that locally at 6.3%, this is despite retailers being dependent on the domestic market which has a share of 82%.
Impact of downgrade
EY said that the recent downgrade by Standard & Poor’s (S&P) and Fitch to junk status will impact growth in the sector.
A possible rise in interest rates and currency depreciation will strain consumer’s disposable income.
Following the decision by President Jacob Zuma to recall former finance minister Pravin Gordhan from an investor road show, and the downgrade, the rand declined more than 9%. Analysts believe the inflation outlook will be impacted by the weakening of the rand.
EY explained that retailers with a diversified geographic earnings will be better positioned to withstand the pressures of the downgrade.
Even though grocers may face pressure, they will be better positioned for “sustainable” profit growth.
Clothing retailers will have to face competition from foreign retailers, price pressures as currency depreciates. These retailers will also be challenged by the changing consumer behavior.
Semi and non-durable retailers will be impacted by currency depreciation, which will increase prices increases.
Further, growing debt and the increased cost of borrowing will impact consumer demand for goods.Fin24.com
New retail report reveals South Africa's most customer-centric retailers
26/04/2017 - 12:20
A recent survey conducted by the global leaders in customer science, dunnhumby, titled the Customer-Centricity Index (CCI) reveals that South Africa’s most successful apparel retailers are those with a high focus on ‘customer-centricity’ defined as focusing on creating a positive customer experience by placing your customer in the centre of your retail decisions. According to the recent study, the local retailers that scored the highest on their overall customer-centricity score include Fabiani, Woolworths, H&M, Miladys, Markham, Cotton On and Mr Price.
Woolworths celebrates 10 years of the Good Business Journey
26/04/2017 - 10:37
Woolworths Holdings Limited (WHL) is pleased to announce the 10th anniversary of its Good Business Journey (GBJ), a flagship South African sustainability programme that was launched in 2007 by Simon Susman, now Chairman of WHL, as a commitment by Woolworths to make a difference to people, communities and the environment.
Walmart offers discount for store pickup
26/04/2017 - 10:21
In a move designed to save on shipping costs while offering flexibility to customers, Walmart will begin offering discounts when shoppers opt to pick up an online order in store.
Maize crop bodes well for food inflation
26/04/2017 - 08:31
It will be a year of plenty for SA with expectations for a maize harvest 87% bigger than the 2016 crop. The bounty comes after crippling drought in 2016 resulted in the smallest summer harvest since 2007.
Retail sales drops to lowest rate in 7 years
25/04/2017 - 14:14
Retail sales have taken the biggest fall in seven years during the first quarter of the year, as rising living costs had an adverse effect on disposable income spending.