South Africa: ‘Retail is in for a tough period’ as consumers pinch pennies

By Xolisa Phillip, in Johannesburg

Posted on July 31, 2020 09:38

South African retail trade sales declined 12% in May 2020 compared to the same period last year, signalling a trend that is going to be the new normal.  

With that follows the economy projected to contract 7% in 2020, and this comes with sectoral distress which manifests in job losses.

In the first quarter of 2020, South Africa’s official unemployment rate rose to 30.1% – one of the highest among emerging-market economies.

People “buying what they need and not what they want”

The South African consumer is on the back foot and facing considerable uncertainty. The latest FNB/BER Confidence Index, published in the first week of July, shows that consumer confidence is at historic lows.

Casparus Treurnicht, an analyst at Cape Town-based Gryphon Asset Management, anticipates that for the foreseeable future consumers will not be buying items which will empty their wallets.

“You will find that people will be placing a strong emphasis on building up a buffer. Cash will not be flowing out of their wallets to purchase luxurious and unnecessary items. People will be buying what they need and not what they want,” Treurnicht tells The Africa Report.

The pandemic and the government-imposed lockdown on the economy will add pressure to consumers’ disposable incomes.

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This will mainly be because of retrenchments and bankruptcies, and a real economic growth rate lower than population growth.

That means “we are moving backwards. This was already happening before COVID-19 struck, which is now amplified,” says Treurnicht.

Under pressure

The COVID-19 pandemic and lockdown regulations since 27 March 2020 have had an extensive impact on economic activity,” according to Statistics South Africa (Stats SA).

The results of a Stats SA survey on retail trade indicate a 12% year-on-year sales decline in May 2020. The main contributors were:

  • Retailers in food, beverages and tobacco in specialised stores (-29,1%)
  • Retailers in household furniture, appliances and equipment (-30,1%)
  •  All “other” retailers (-55,5%)

“Retail is in for a tough period in the years to come,” predicts the Cape Town-based analyst.

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That means consumers are more likely to trade down and buy fewer durable goods.

“TFG – the Foschini Group – buying Jet is a prime example of how they are trying to protect lost sales which would have impacted their upper end,” explains Treurnicht.

He adds: “Same for Truworths, Woolworths Clothing and some of the offshore brands, such as Zara, targeting this space. Pep should perform well in the sense of protecting revenues.”

Two weeks ago, TFG revealed a proposed deal in terms of which the listed group will acquire low-cost clothing retailer Jet from Edcon, which is currently in business rescue.

Game and Makro, part of the Massmart group, will also experience decreased sales on big ticket white and silver goods, notes the analyst.

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“I am impressed by Woolworths Food and how they navigated through the last few years. Now, they’ve focused on quality – something, I believe, Checkers and Pick n Pay, more so, lack. But even so, Shoprite should be in a similar position in groceries as Pep is in clothing,” concludes Treurnicht.

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