Retail party may be over before Christmas

Posted On Monday, 24 October 2005 02:00 Published by
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THE three-year-long consumer spending binge could end soon if the Reserve Bank’s warnings of interest-rate hikes are taken seriously.


23 October 2005

THE three-year-long consumer spending binge could end soon if the Reserve Bank’s warnings of interest-rate hikes are taken seriously.

Retailers have enjoyed the fruits of a real increase in the disposable income of consumers over the past few years, thanks to interest-rate cuts and wages that have risen quicker than the inflation rate.

Consumers, too, have been quick to cash in on the easy-credit schemes offered by most smart retail outlets.

The party has to stop, and there are signs that it could be slowing down. This means retailers will have to be more vigilant about the risks of over-indebtedness among their customers.

Syd Vianello, retail analyst at Nedcor Securities, says every major retailer is making the most of the easy-credit environment.

Retailers, such as Mr Price, have switched to a credit option and Truworths have done the same with their Identity and YDE brands.

Go Banking, the partnership between Pick ’n Pay and Nedbank, launched a credit card this week.

“Everything is moving in favour of credit,” says Vianello.

The impact is likely to be an immediate boost to turnover but “you can only maintain the momentum so long as [credit extension] increases.”

The risk for retailers (and consumers) is the possibility of an interest-rate hike, which Reserve Bank Governor Tito Mboweni has intimated may happen as early as December.

Consumers are no longer as “wealthy” as they have been in the past two years. The domestic petrol price has risen by about 40% this year, for instance.

Despite this, the signs are that consumers are still buying the same amount of fuel, says Kevin Lings, economist at Stanlib Asset Management.

Consumers’ demand for credit has continued to accelerate, even though house-price growth has slowed down, he says.


Figures from the Reserve Bank show there has been an increase of 45% from a year ago of credit card debt among private individuals.

And yet Lings stresses the consumer is in “no way under stress”. He cites the reason being the very low debt default levels reported by both banks and retailers, as well as the fact that insolvency rates are extremely low.

Consumers are indebted to the tune of 62% (an all-time high) of their household disposable income. However, the view is that the cost of servicing debt is very manageable at around 6.5% of disposable income. These ratios are well below many that apply in other countries. But the true cost of servicing the higher levels of annualised debt has not yet been felt, says Vianello.

Lings adds: “What this means for retailers is that the rate of growth is slowing, despite all the credit. The more aggressive use of credit by consumers means retailers need to be more vigilant when interest rates increase.”

The retail sector will be one of the first to absorb the pain of an interest-rate increase. The sector takes about three or four months to work through the effects of an interest-rate hike, but the market anticipates the hit — “and the sentiment goes negative on day one”, says Vianello.

Prominent retailers have recently released results or issued trading updates. This gives a sense of where they currently stand:

  • On Thursday the Mr Price group said headline earnings would be 50% to 60% higher than the corresponding period the previous year;
  • Earlier this week, Pick ’n Pay’s results showed a strong performance in SA for the six months to August, though losses in Australia were far higher than the market had expected. This is the group’s second attempt in the Australian market. Woolworths remains, but Truworths and Clicks have sold their Australian operations;
  • Edcon said in a trading statement this month that sales for the 26 weeks ended October will be about 22% higher than the corresponding period last year. Diluted headline earnings a share will have risen between 35% and 40%;
  • Clicks releases its annual results this week. The group anticipates that diluted headline earnings a share will be between 60c and 65c a share.

It is one of the few retailers that has not been enjoying good times as part of the consumer boom. Says one analyst: “It shows what a bad job they’re doing when things are so good.”

He adds they spent too much on pharmacies, and people have come into their space and encroached on their product mix

Clicks is expected to make announcements this week on its strategy going forward, which will probably see the company revert to where it started: as a health, beauty and pharmacy outfit, and omit most of the homewares.

Clicks’ margins will also be under pressure from the drug side, as it intends retaining the government-suggested margins on the price of prescription drugs to 26%, capped at R26. Margins were previously about 36%.

This decision comes despite the fact that Clicks was one of the most vehement opponents to the regulations, and spent millions trying to stave it off.

The strategy is to grow a loyal base of customers. What the group intends to do is link pharmacies nationwide to a computer base to facilitate ease of access to pharmaceuticals


Publisher: Sunday Times
Source: Sunday Times

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