Stores with middle-income customers likely to benefit most

Consumer Industries Editor

FALLING interest rates, rather than tax cuts in the lowest brackets, are likely to provide most of the fuel for growth in retail sales in the next six to eight months, favouring retailers with the largest exposure to middle income consumers.

In the past week three major retail groups have reported results: Ellerines, Pick 'n Pay and New Clicks. Each has a different product orientation, but all three serve the full spectrum of consumers in different proportion.

Ellerines recently entered the top end of the furniture market by acquiring Wetherlys, which will only start contributing to its results in the 2004 financial year.

But the group has been growing its middle-market furniture chain, FurnCity, where the number of outlets rose to 137 from 109. FurnCity accounted for 19% of turnover in 2003, unchanged from 2002, but it grew its contribution to operating profit to 15% from 14% previously.

In the same period, Ellerines reduced the total number of stores in the group to 594 from 606.

Andisa Securities analyst Evan Walker says the majority of Ellerines' turnover and profit is still derived from the lower-income consumer who is not particularly sensitive to interest rates.

Ellerines' growth prospects are constrained by the limitations of its debtors' book and, as Profurn showed, hire-purchase furniture companies cannot grow sales too quickly while maintaining a good-quality book.

Pick 'n Pay serves the top end of the market with its homeware store Boardmans and the lower-income consumer with outlets such as Score Supermarkets and Boxer Superstores, but these are relatively small contributors to the group.

Most of group income is derived from Pick 'n Pay stores, mini-markets and hypermarkets, and these serve different income levels.

Walker says interest rate cuts will help to grow the group's sales while its product mix will move towards higher margin products.

When middle income consumers feel wealthier, they "buy up" on a range of items . This will help Pick 'n Pay to counteract the turnover effect of falling prices on basic food items.

New Clicks serves the wealthier end of the market through its The Body Shop chain in SA, as well as through its Musica and CD Wherehouse outlets.

Its Discom chain serves lower-income consumers. But the bulk of the group's market, too, is the middle income, interest-rate sensitive consumer shopping at the Clicks stores.

Clicks accounts for more than half of the group's local turnover.

Those stores have not performed to expectations in the past year, showing turnover growth of 11% and a 1,4% decline in operating profit.

The main reason is falling sales in the lifestyle category, which is being addressed with new management and fresh ranges.

The group said that initial indications were that those ranges were meeting customer expectations for value and quality.

Walker says Clicks' performance in the coming months is dependent on how well its lifestyle products perform. The stronger rand could also help to bring down the costs of its imported products, which account for about 15% of its stock .

Ellerines' share price has almost doubled in the past year to R27,40 from about R15 last October.

In the same period Pick 'n Pay's share price has moved from R14 to about R14,55, with considerable volatility in between.

New Clicks, also a volatile share, has improved to about R7,50 from R6 last October.

Oct 23 2003 07:34:50:000AM Charlotte Mathews Business Day 1st Edition