October '2003

PROSPECTS for retailers towards the end of this year are looking good.

Inflation is declining and appears under control, the petrol price is below last year’s level and further tax relief provided a welcome boost for consumers.

In a report by Rohan Dyer, an HSBC Securities retail analyst, published in the latest SAMCO Report, he says there is a strong likelihood of further interest rate cuts over the next six months.

In addition, consumer confidence has picked up and a resumption of a robust disposable income growth pattern bodes well for retail sales, he says.

He points out that retailers scored from escalating inflation last year, but declining selling price growth in 2003 potentially has negative implications for operating margins.

Not all companies are at risk, though. Those generating topline growth in excess of growth in the cost base will at least have the leeway to offset possible gross margin declines as growth comes off.

Largely as a consequence of the stress of shifting consumption patterns a few years ago, retailers are now better equipped to handle possible margin pressure.

Inventories are leaner, mark-downs are fewer, debtors books are cleaner, cost cutting has been aggressive and overcapacity has caused the balance of power in lease renewal negotiations to swing the way of the retailer.

Management teams nowadays complain less about outside influences and instead seem better focused on satisfying customers needs, Dyer says.

He notes that gains in clothing retail sales per square metre over the last few years have been mostly volume driven whereas extensive help from selling price inflation explains more than the lion’s share of the rise in food retailers’ sales per square metre in nominal terms.

"In fact, it is revealing that there has been no real growth in the food retail market’s densities since the mid-nineties." The density comparison by company shows that Truworths and Edcon stand out among the clothing retailers over the last five years, although all have improved materially since 2000.

Edcon has cut its trading area by more than its peers, but has succeeded in maintaining solid sales growth, implying higher densities. Truworths has managed to deliver appealing merchandise with admirable consistency in the recent past. Spar has performed best of the food retailers.

The group opened a lead on Pick ‘n Pay from 1996 to 1998 when the latter’s densities slackened. The gap has not grown since then, though. Woolworths has improved by the most more recently since Simon Susman took over as CEO.

Real growth in returns (earnings before interest and tax) on trading area is not as rosy a picture for the clothing retailers as is the case for sales per square metre.

Not only has sales growth easily outpaced operating profit growth in nominal terms in clothing retail over the whole period, but clothing selling price inflation has been well below CPIX, the deflator used for operating profit growth.

The opposite has applied in food retailing, where consistently strong selling price increases have boosted margins. The accompanying chart reflects that Pick ‘n Pay has put some distance between itself and Shoprite.

This proves that Pick ‘n Pay’s profitability improvement has not been driven by trading space growth alone. The company has out-shone Shoprite through superior maintenance of volume grow, more stable gross margins and better cost control.