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RETAILING: Bleak Christmas for Retailers

 



Recent Western Cape Business News

RETAILERS are going to have to pull out all the stops to ensure that the declining share of Christmas sales (November/December) to annual retail sales is arrested. The peak contribution of 21.4% was achieved in 2005, before declining to reach 20.6% last year (roughly on par with that experienced at the end of the last decade).

Luke Doig, senior economist of Credit Guarantee Insurance says, as interest rates and inflation have risen, so has the real performance of retail sales declined, with a real decline of 0.4% being registered last year – the only negative performance of the decade to date. “The 11.7% and -1.7% outcomes in the first eight months for nominal and real retail sales respectively, is ample evidence of the pressures facing consumers. In fact, the most recent monthly sales bear testimony to the severe strain that debt servicing and higher fuel costs are placing on purchasing power. What retailers will be hoping for is a turnaround in the recessionary conditions that have bedevilled the sector over the last six months or so. Are there tentative signs that pressures are easing, albeit marginally?”

He points out that household debt to disposable income declined to 76.7% in the second quarter of 2008 from 78.2% in the previous quarter, indicating some respite in the demands on households’ monthly expenditure demands. Since the peak in fuel prices in July, petrol and diesel have fallen by R1.29 per litre and R2.15 per litre respectively. For October, this implied that the entire economy benefitted to the tune of cost savings of some R1.16 billion for petrol and R1.72 billion in the case of diesel. This obviously helps production costs and thus has a direct impact on inflation. Hopefully, manufacturers are passing these savings on.

Secondly, the pressure on consumers’ monthly fuel bills will have eased somewhat, and may yet enjoy further relief in the months ahead if oil prices remain subdued and the rand stabilises. The month-to-date over-recovery (26 September to 15 October) of 29c per litre for petrol and 27c per litre for diesel would see additional fuel savings of some R477 million in November alone. But that was before the rand tanked to R10-85 a dollar, so these hopes may yet turn out to be fruitless, Doig says.

“But will this be sufficient to arrest the inclement impairment of disposable income, such that real sales over year-end will be positive? That is very unlikely. The wealth effect from higher share (equity) and house prices that many consumers were using to finance expenditure, has reversed,” he says.

Real house prices are back at levels seen in September 2006 (according to Absa), with individuals finding substantially less equity to access in their bonds at present. Debt servicing costs (as a percentage of disposable income) have all but doubled from the 6.4% experienced in 2004.

“Massmart recently reported same-store sales up 11.8% in the 13 weeks to end-September, but the question is whether this will persist and be indicative of the entire retail spectrum. Despite retail inflation boosting sales at present, our prognosis is for nominal sales growth over Christmas of some 11%, or a 2% real decline. However, we do caution that there are strong downside risks to this scenario,” Doig warns.

“Retailers will have to fight to attract this additional R10.3 billion spend (compared to 2007). Furthermore, there may already be retailers that are sitting on excess stock, while others may be concerned at ordering too much lest sales expectations are not met. Our advice to manufacturers and wholesalers at present would be to insist on very short terms. We suspect the gathering of due payments in February and March 2009 may prove to be very difficult and turn out to be true ‘hangover months.”


 
 
 
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