Retailers look forward to Thursday

Posted On Tuesday, 10 June 2003 02:00 Published by
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Retailers of semi-durable and durable goods, such as clothing and furniture, are likely to be among the greatest beneficiaries of this week's hoped-for interest rate cut

Retailers of semi-durable and durable goods, such as clothing and furniture, are likely to be among the greatest beneficiaries of this week's hoped-for interest rate cut, irrespective of whether or not they offer credit terms or are purely cash retailers.

Industry said yesterday the expected effect of an interest rate cut was increased sales volumes.

If customers found after a few months that their house and car repayments had reduced and they had more money in their pockets, they tended to spend the extra on items like clothing and furniture.

They were unlikely to buy more food because it was not a discretionary purchase.

Sales volumes are critical for retailers because fixed costs, in the form of rentals and staff, are relatively high, so higher sales volumes are quickly translated into a higher operating profit.

Fashion retailer Foschini's financial director, Ronnie Stein, said yesterday a one percentage point cut in rates would not make a big difference, but if rates dropped by more than one percentage point, as was hoped, it would have a "hugely positive effect".

Consumer confidence would increase and consumers would have greater disposable income, he said.

Furniture retailer Ellerines financial director Reg Rawlings said an interest rate cut would be positive for customers and it was a long overdue step.

The R13,5bn tax cut in the budget benefited Ellerines' customer base and an interest-rate cut should do the same.

An interest-rate cut has a positive and a negative effect on retailers who offer credit terms because, while their sales rise, the margin on financing is reduced.

In theory, there is a short-term window because the adjustment to the usury rate the official interest rate published in the government gazette that affects credit contracts lags behind the prime rate.

Edcon investor relations executive Tessa Christelis said yesterday that in recent times the trade and industry department had been adjusting the usury rates more rapidly, and was particularly likely to do so when rates were declining.

Customers would pay better when interest rates were low, retailers should be able to ease their credit granting terms and they should also be able to release some of the bad-debt provisions built up when customers were battling to meet their commitments.

Rawlings said debtors' arrears would decline because a lower interest rate was used to determine arrears and because, as the effects of the cut filtered throughout the economy and customers had more cash, they should be able to bring down their arrears payments.

Christelis said Edcon had no intention of releasing its bad-debt provisions. Customers tended to pay better some time after an interest rate cut, but there was usually a lag of about 12 months in the baddebt experience, Christelis said.

Rawlings said a cut in interest rates would not affect contracts already in place because these were written at a fixed rate.

However, it would affect new contracts written after the date of the cut.

Ellerines would not expect an immediate spike in volumes, though, as it would take four to five months for an interest rate cut to filter through to turnover.

A cut in June would become evident in turnover by December. The effect also depended on the proportion of finance charges to turnover.

Ellerines could absorb easily a one percentage point cut in rates.

If the cut were to be two or three percentage points, it would be hoped the increase in sales volumes would compensate.

Although consumer spending has shown surprising resilience in the past year of high inflation and interest rates, which has translated into profit improvement of over 30% for many retailers, there is was still room for growth, industry spokesmen said. Foschini's Stein said while the last year was a good one for retail, a look five years back showed how retailers have had struggled in the intervening years. "There is still a lot of upside in the sector and that goes for all retailers," he said.

Business Day

Publisher: Business Day
Source: Business Day

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