RETAILING: A Bleak Christmas Predicted
Recent Western Cape Business News
Consumer credit organisations are predicting a bleak Christmas this year, particularly for the retail industry. Price increases, job losses and low growth in the retail sector together with rising bad debts on credit portfolios are causing consumers to spend less.
There has not been a significant turnaround in consumer spending this year despite South Africa’s central bank reducing interest rates by 500 basis points since December 2008. In addition, 253,000 jobs were lost in the first six months of 2009 and the last quarter has seen the worst job loss levels recorded this year. Consequently bad debts are on the increase and prices will continue to rise, says PIC Solutions, the leading specialist credit risk solutions company in the EMEA region.
The NCR expects 150,000 consumers to be under debt review by Christmas. 100,000 consumers owe R20 billion overall, with R12 billion of that resulting from mortgages. Nedbank lowered its 2009 earnings outlook in August after reporting a slide in first-half profit as bad debts climbed at its corporate and retail units. Consumer levels in debt counselling are also on the rise.
Bad debts are magnified in a low credit growth environment and will only be realised over time, warns PIC Solutions, so this trend is set to continue while the bad debts roll through. Although South Africa is heading for gradual economic recovery, there will be a lag before credit portfolios and bad debts have caught up.
The retail sector might be especially hard hit over the Christmas period after a difficult year to date. In the first eight months of 2009 the retail industry saw a recorded growth in nominal sales and real sales of 6.2 % and -4.8% respectively. Simon Trupp, Director of PIC Solutions, says that, ‘‘Growth in retail credit is proving difficult due to limited credit offers and customer uptake’’.
A recent report from Truworths, South Africa’s biggest clothing retailer shows that group retail sales rose 10% in the 18 weeks from June 29. The company says that trading will remain challenging during the remainder of the year. Competitor Foschini showed an increase of 1.8% to 231.9c in diluted headline earnings per share for the six months to the end of September. There was no constant trading pattern in the first half of 2009 and consumer spending decreased during the first five weeks of the second half of the year. They predict no improvement until the last quarter of the financial year.
Statistics SA released information recently which showed July’s retail figures dropped slightly by 3.9% year on year, compared with a 6.9% fall in June. Retail sales then fell 7% in August year on year. Adds Trupp, ‘’Affordability is restricting credit spend for customers, although retailers continue to look at advanced techniques to target good credit worthy customers”.
JSE-listed micro-lender and furniture retailer African Bank Investments (Abil) posted an 11% fall in full year profits today resulting in a fall of headline earnings per share to 225c. Abil, which also owns furniture retailer Ellerines, said that it became apparent at the start of the second quarter that the domestic economy was weakening rapidly and that longer-term liquidity was becoming scarcer. The company also said that Ellerines sales volumes continued to remain relatively depressed. Earlier this month JD Group also reported a drop in its full year diluted headline earnings. The group announced a fall per share from 298.3 cents to 44.2 cents in the year ending August. The Group said Incredible Connection and Hi-Fi Corporation delivered lower revenue of R3.98 billion for the year compared to R4.01 billion last year.
The annual performance of retailers is largely determined by Christmas trading in the second half of the year, so a fall in consumer spending will badly affect the industry for this financial year.
PIC Solutions warns of several other factors contributing towards low household expenditure and therefore a drop in retail sales over the Christmas season.
Consumers continue to have negative confidence in the economy. At the end of September a survey by First National Bank (FNB) and the bureau for Economic Research (BER) showed consumer confidence falling to 1 in the third quarter from 4 in the second quarter.
Many consumers are aware that due to the past recession, annual bonuses may be held back. This concern will also cause a fall in retail sales and customers will be looking to purchase on credit.
Going into 2010 there are likely to be further problems for consumers if the proposed Eskom 45% rate hikes are given the go-ahead by the National Energy Regulator of SA (Nersa) early next year.
PIC Solutions concludes that although stores are stocking up for Christmas, consumers will not be spending as much as in previous years. It predicts that South Africa will continue to witness the effects of the past recession into the second quarter of 2010 before there are any signs of economic growth.
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