FOLLOWING on from a dismal retail performance last year, retailers are no doubt looking forward to an ongoing improvement in their trading environment. Rising producer prices and declining consumer inflation has meant that margins have had to be managed extremely carefully but, mercifully, the financial position of individuals has improved over the course of the year. The 3.1% real decline in Christmas sales in 2009 (against our forecast of -3.8%) thankfully marked the trough in consumer spend with the 3.1% contraction in real household consumption expenditure in 2009 likely to recover to around 2.5% this year, says Luke Doig, Senior Economist at Credit Guarantee..

Prime has fallen a cumulative 6% so far in this cycle, with the additional 100 basis points decline in 2010 to date allowing for a recovery in retail sales over the course of the year. Nominal and real retail sales in the first eight months of 2010 have recorded growth of 6.3% and 4% respectively.

Of concern was the slowdown in August with real growth of 4.6% year-on-year following June and July’s 7.6% and 8% growth respectively. This raises the question of whether the domestic consumer can maintain such momentum given the additional impetus that foreign visitors provided during the World Cup.

Job shedding last year severely crimped domestic demand with Gross Domestic Expenditure exhibiting a 1.8% real fall in 2009 but the first half of 2010 has seen a 2.5% real improvement. We remarked last year that the fall in debt servicing costs (as a percentage of disposable income) to below 8% this year may not have the desired impact as job security would remain a challenge in the minds of many. The run-up in household debt to disposable income to 80.6% and 80.2% in 2008 and 2009 respectively has fallen only marginally to 78.2% in the second quarter of 2010 but the debt service outcome to mid-7%, we believe, will serve to assist consumer demand more than is perhaps accepted.

Consumers have either cut back on expenditure, or competition has kept prices in check. Similarly, non-durables (essentially food and power/fuel) has seen only a 1.7% real improvement in the first half of 2010 as consumers buy-down in an attempt to allow for expenditure on luxuries and semi-durables. The resurgence in expenditure on vehicles, furniture, appliances and electronic goods (durables) has seen a remarkable resurgence this year, both on the back of lower interest rates and excitement surrounding the World Cup. This has gone hand in hand with a 5% real growth in spending on clothing, footwear, household textiles, tyres and vehicles parts (semi-durables) in the first half of 2010 following a 1.5% real fall in 2009.

The declining contribution Christmas (November/December) to around 20% over the past two years – from 21.4% in 2005 - must be of concern to retailers but is essentially a reflection of the harsh economic climate that has prevailed. While nominal annual retail sales have risen from R250 billion in 2002 to R524 billion last year, the poor real Christmas sales outcomes of -0.9% and -3.1% over the last two years were caused by rising interest rates and inflation. There has been significant relief on both these fronts and, together with the improving financial position of consumers, implies that this year may well bring a smile to many manufacturers, wholesalers and retailers.

One issue that would potentially boost the situation relates to restocking, given that inventory levels have been ruthlessly run down in tandem with plunging sales. Industrial and commercial inventories to Gross Domestic Product (GDP) fell from 17.4% in 2007 to 14.2% last year and further to 12.5% and 12.3% in the first quarter of 2010 and the second quarter of 2010 (seasonally adjusted annualised rate). Recent wholesale sale data hint at a recovery of restocking in the third quarter of 2010. Following dismal nominal and real wholesale sales in the first eight months of 2010 of 5.2% and 0.7% respectively, August saw the strongest year-on-year improvement of 10.9% nominally and 4.7% in real terms.

After bottoming out at 3.8% in July 2009, the real prime interest rate (simply Consumer Price Index (CPI) less prime) has risen to 6.3% at a time when prime has fallen from 10.5% to 9.5%. Certainly falling inflation – due to lower demand and a stronger exchange rate – is the main contributor hereto. Given the extremely benign inflation outlook – the latest Reuters Econometer puts CPI at 4.9% in 2011 – and the dismal employment situation, it could be argued that a 1% cut in the Repo rate now would not be out of place.

Mitigating against the above positive factors are actual and potential fuel price increases. At first glance, the 9.8% expected increase in nominal Christmas sales may appear over-optimistic, however above-increase salary increases are providing a buffer in our opinion and we would not be surprised if the outcome crept into double digits.

With retail inflation being so low - in some cases negative for certain sectors – the real increase could similarly exceed current expectations. Pursuit of a portion of this additional R10.35 billion spend (compared to 2009) will have to be keenly fought for. Our advice to manufacturers and wholesalers at present would be to insist on short terms and to be wary of abnormally large orders.