2015 Christmas sales outlook
Luke Doig, Senior Economist at Credit Guarantee Insurance Corporation.
“Steady as she goes”
The nominal and real growth in December 2014 retail sales of 7.3% and 1.9% respectively (2013 = 5.4% and 2% respectively) was ahead of our expectations of 6% and zero respectively, driven largely by the fuel dividend with decreases in petrol and diesel prices in November and December 2014 totalling R1.14cents per litre. With this unlikely to recur this year, the increasing pressure on household spend as economic growth has ebbed presages a disappointing year-end outcome, although retailers will have been dreaming about the first ever R100 billion sales month.
Real demand (Gross Domestic Expenditure) growth of just 0.4% year-on-year in the first half of 2015 (3.8% nominal) was recorded while real growth of 3.1% (5.6% nominal) was seen in final consumption expenditure by households (FCEH). The lack-lustre growth performance of the economy should have put pressure on big-ticket spend so the real growth in sales of durable goods (vehicles, furniture, appliances and electronics) and especially semi-durable sales (clothing, footwear, household textiles, tyres and vehicles parts) appear strong. However they accounted for just 8.2% and 7.8% respectively of current FCEH in the first half of 2015. Notable is the intense pressure on non-durable spend (essentially food and power/fuel; 39.1% of FCEH) with real growth of just 1% in the first half of 2015. Spending on services (rent, medical, transport and communication; 44.9% of FCEH) is also reflecting embattled household spend with just 1.3% real growth in the first half of this year.
Final consumption expenditure by households (FCEH): 1st half 2015 vs 1st half 2014
Source: SA Reserve Bank Quarterly Bulletin
Strike activity has been far more muted to date in 2015 which implies less lost wages as a result while also giving rise to a lower 2014 base. Retail sales in the first eight months of 2015 are 7.5% higher in nominal terms and 3.1% in real terms with textiles, clothing and footwear indicating the strong performance reflected in the household consumption figures above. The DIY boom relating to residential upgrades is also evident from the rapid growth in hardware, paint and glass sales.
Retail sales: Jan-Aug 2015 vs Jan-Aug 2014
Petrol and diesel prices are estimated to decrease by around 22 cents per litre and 9 cents per litre respectively next month, and if price and currency movements during November are negligible, this will put petrol prices at roughly the same level as in December last year. Diesel may be some 34 cents per litre cheaper implying a fuel bill around R600 million lower in December 2015 compared to the same time last year. Hopefully load-shedding is also absent during the month.
As growth has ebbed, so has growth in real disposable income. GDP growth of 2.2% and 1.5% in the previous two calendar years saw disposable income of households rise by 2.5% and 1.5% respectively. Real disposable incomes are expected to improve by 1.5% in 2015 and understandably when growth in real disposable income slows, so does that in real consumption expenditure by households. We expect FCEH to advance by 1.6% this year.
Affordability and the wherewithal of consumers to weather the economic climate drives consumer spend. Although debt servicing costs were relatively low at 8.6% of disposable incomes in 2013 from a peak of 14.1% in 2008 (at a household debt to disposable income ratio of 86.4%), this figure has ticked up to 9.4% in the first half of 2015 and higher still following the July 2015 interest rate hike. We remain hopeful that the SARB will not have to hike rates again this year, although its hand may be forced it the Fed does hike later this week. Household debt to disposable income has ebbed to 78.3% in 2014 and hopefully lower still during the latter half of 2015 but the stagflation threat facing the country (stagnation in growth but rising inflation) also poses a conundrum for the SARB. Notwithstanding any further SARB actions, debt servicing costs are starting to edge ever higher.
Competition, price consciousness and the commensurate pressure on loyalty are factors that all retailers are facing. In this weak demand environment, price cuts may be necessary to push volumes and clear stocks. Risks in the credit space have seen many retailers shift focus and try to gain momentum in cash sales. Credit extension to households has averaged a very mediocre 3.6% in the first eight months of this year but it is too early to say whether the uptick in August’s growth to 4.2% year-on-year from July’s 3.7% represents a trend shift. National Credit Regulator figures show that for all credit providers (4 718 currently registered), the gross debtors book amounted to R1,625 billion in the second quarter 2015, an increase of 3.6% on the second quarter 2014. Of this total, R97.1 billion or 6% is longer than 90 days and thankfully down on second quarter 2014’s R100.4 billion. Online spending for non-food goods and services is certainly growing and retailers need to have a presence here in order to offer consumers convenience. Online grocery retailing of scale is limited by logistics issues and while growing apace, it will only become a larger and meaningful threat in the medium-term.
Over the years better stock management has seen inventory levels ruthlessly run down with industrial and commercial inventories to GDP falling from 15.8% in 2007 to 14% last year and slightly lower in first half 2015. The large decline in final demand (GDE) in second quarter 2015 of -7.2% (saar) was largely driven by the almost -R49bn (saar) movement in inventories. The YTD August growth in wholesale sales of 0.7% in nominal terms (2.2% in real terms) is further evidence that inventory levels are being run down and that just-in-time ordering is the order of the day. Our experience to date is that the extent of large advance ordering is no larger than previously.
After recovering from the trough of 11.4% of annual retail sales in 2009, the contribution of Christmas sales improved to 12.1% in 2011 before ebbing to 11.6% last year. The trend by retailers to shift towards a greater reliance on cash as opposed to credit sales, tighter lending standards and the waning appetite for credit by households implies a further waning in the contribution of credit to Christmas sales.
As mentioned, we are detecting a slight improvement in volumes in the run-up to Christmas across the food manufacturers and wholesalers and similarly for certain freight operators. The low growth in household furniture and appliances sales (-0.1% nominal, 0.4% real in the first eight months) is also evidence of inflation in that sector on the back of the weaker currency although sales of higher end appliances may continue to hold up this season. The cellular sector is showing steady growth as opposed to the normal ramp-up towards year-end. The current environment would tend to see pressure on semi-durable sales although year-to-date sales of textiles, clothing, footwear and leather goods have grown by 8.4% compared to the first eight months of 2014.
Most measures of consumer confidence and personal financial health justify a cautious stance. Given this cautious outlook, we foresee Christmas sales growing by 7.4% in current prices and by 1% in real terms. We are always wary of resultant potential stock overhangs in the first quarter of the new year and believe that retailers will need to price very keenly to move stocks and this may see consumers benefit. But the wherewithal to spend remains severely constrained and the current outlook for this Christmas trading season will hopefully be very much on a par with last year’s performance; for that alone we need to be thankful. Certainly we would caution consumers against taking on unnecessary debt. Retailers are going to have to take out all the stops if they wish to garner a share of the additional R7 billion in additional sales expected in December in a best case scenario that should see monthly sales top R100 billion for the first time.
Table – Christmas retail sales analysis
Source: Stats SA & SA Reserve Bank; CGIC analysis and forecast
