January 19, 2004

By Vera von Lieres

Cape Town - Clothing and food retailers are operating in a low-inflation environment, with top-line inflation a lot less than the expense environment, but of the two, the food retailers are having a tougher time.

Compared with a year ago, when retailers were operating in a rampant, double-digit inflationary environment, many are now experiencing flat inflation or even deflation in some categories.

Consumers are feeling the benefits of low inflation - and, in some cases, a deflationary retail environment - passed on by retailers.

Some clothing companies have passed on all deflation, while others have kept a bit back

Bulk discount retailer Massmart reported inflation close to zero in the 26 weeks to December across its merchandise ranges, and still managed sales growth of 15.6 percent.

Food retailer Shoprite experienced inflation of less than 1 percent in the half-year to December, although turnover rose only 5.6 percent because of a nationwide strike late last year.

Value clothing retailer Mr Price delivered surprising deflation of 10 percent in the third quarter of last year, passing on to consumers the benefits of lower costs from a strong rand. It made up for this in volumes, with unit sales of goods still 24 percent higher.

Edgars Consolidated Stores, which has diversified from a clothing retailer with the recent acquisitions of CNA stores and furniture and lifestyle retailer Boardmans, experienced 3 percent price deflation in its flagship clothing division, Edgars, in the last quarter of the year and 4 percent deflation in United Retail, home to Jet and Sales House

Year-on-year inflation at Pick 'n Pay was down to about 3 percent and holding stable across the board, said chief executive Sean Summers. Some specific baskets were down dramatically - for example, nappies were down by R40 - while in basic commodity items such as maize there was little inflation to speak of.

Summers said the group was managing to counter the effects of low and virtually no inflation with a strong increase in consumer sales units.

Pick 'n Pay continued to adopt an aggressive position on pricing.

However, in selected cases, such as top-end store Woolworths, inflation in both clothing and food was running well ahead of CPIX - the Reserve Bank's inflation measure, which excludes mortgage costs. 

The group's trading update for the six months to December showed surprisingly high inflation of 9.6 percent for clothing and homeware and 8.6 percent for foods, while the sales rise was 13.7 percent.

Woolworths sources about 90 percent of its merchandise in South Africa.

Inflation in locally manufactured goods is high but will fall materially because domestic inflation is slowing.

On the clothing side, Woolworths had been trading ranges up with its up-market W Collection - moving price points higher to try to attract higher margins, analysts pointed out.
This is easier to do in a higher-end retailer than a value retailer such as Mr Price.

On the food side, inflation at Woolworths is up because of the higher-income base of customers. Compared with the likes of Pick 'n Pay, Shoprite and Spar, Woolworths is not in a competing market and in a sense makes its own pricing, given its up-market customer base.

Retail analysts pointed out that Woolworths also sold a lot of pre-prepared foods, where there was more inflation because of the high labour component and the more complex manufacturing process.

This contrasts with other retailers such as Shoprite, which caters for a different market segment, supplying more basic food items and experiencing more deflation or low inflation.

Mark Ansley, retail analyst at African Harvest Fund Managers, said the biggest difference when looking at inflation between food and clothing retailers was that food retailers' products were directly comparable, whereas clothing retailers could hide deflation more easily.

For example, the price of goods purchased at Pick 'n Pay could be compared directly with prices of goods at Spar or Shoprite/Checkers.

With clothing retailers it was difficult to compare the price of a T-shirt bought, for example, at Foschini and one bought at Truworths, because of the fabric and trimmings used.

"Clothing retailers can disguise inflation a lot more than food retailers," Ansley observed. "It's a lot harder for food retailers, who are dealing with fast-moving consumer items, to hide in a deflationary environment."

In contrast with Woolworths, which has been moving its clothing ranges up, Mr. Price is a pure value player.

Analysts pointed out that deflation of 10 percent was because a substantial portion of the group's product mix was imported, so it could procure at much better prices offshore, which it passed on to consumers. Volumes rose because of the lower prices.

The year is still fresh but what is certain is that the challenge of trading in a low to flat inflationary environment will continue to be one of the key issues exercising the minds of both food and clothing bosses as businesses move into gear.