Christmas sales forecast to grow by at least 10%

We foresee Christmas sales growing by at least 10% in current prices and around 6% in real terms and, if achieved, this would be a stellar result.

The nominal growth in December 2011 retail sales of 12.8% (8.2% real) was a most welcome result for many outlets. After a strong mid-year 2012 showing, the question is being asked whether the slowdown in real retail sales growth to 4.3% in September from 6.7% in August is a precursor for this festive season. Will there be a similar situation to that in the USA where ‘Black Friday’ sales (23 November the day following Thanksgiving) saw foot traffic grow 3.5% yet sales fall 1.8% in nominal terms?

In the first half of 2012, real demand (Gross Domestic Expenditure) rose 4.5% (10.7% nominal) while real growth of 3.6% (10.2% nominal) in final consumption expenditure by households (FCEH) was recorded. Sales of durable goods i.e. vehicles, furniture, appliances and electronics, accounting for 7.7% of total current FCEH, have benefited from keen price offerings by retailers with real sales growing a remarkable 13.5% in the first half of this year. Similarly, semi-durable sales i.e. clothing, footwear, household textiles, tyres and vehicles parts - 8.7% of FCEH) performed well in the first half of 2012 while inflationary pressures in non-durables (essentially food and power/fuel; 40.5% of FCEH) translated into a 2.6% real improvement in the first half of the year. Spending on services (rent, medical, transport and communication which account for 43.1% of FCEH) came under pressure in the first half of this year with real growth of just 1.5%.

Final consumption expenditure by households (FCEH): 1H’12 vs 1H’11

Source: SA Reserve Bank Quarterly Bulletin

Real retail sales have grown 5.1% (9.6% nominal) in the first nine months of 2012 but questions are being asked about the resilience of the consumer to cope with continuously escalating fuel, power, food, motor vehicle and other administered prices in the face of a stagnant job market. Ever louder noises are being heard concerning high debt levels and the financial vulnerability of many households.

An important contributory factor to the strong performance in retail sales over the past two years has been the strong growth in disposable income of households, driven in turn by wage/salary increases outpacing inflation. Real disposable income of households grew 4.2% in 2010 and 5.2% in 2011, which resulted in real consumption expenditure by households expanding by 3.7% and 5% respectively over the same period. However, the real growth in disposable incomes of households (seasonally adjusted annual rate - saar) slowed to 3.3% in the first quarter of 2012 and 3% in the second quarter. One would expect that this would fall further in late 2012 as many people battle with the aftermath of strikes in the mining and fruit sectors. It is estimated that Lonmin workers lost 12% of their annual pay in the strikes.

A headwind for consumer spending has certainly been fuel costs, notwithstanding the 9 cents per litre decrease in the petrol price and 5 cents per litre in the diesel price this month. Year-on-year, petrol prices are up some 12.5% and diesel costs 8.5% and this may be costing producers, manufacturers and consumers a combined R2 billion more than at the same time last year.

After declining to 11.4% of total annual retail sales in 2009, the improving contribution of Christmas to total retail sales to 12.1% last year was a welcome recovery. Will this trend continue and bring a smile to many manufacturers, wholesalers and retailers? A factor to take into account in this regard is that many more consumers may have to rely on credit – whether it be in-house store credit or that provided by traditional financial institutions. Given that interest rates are at their lowest since the prime overdraft rate of 8% in January 1974, and despite household debt to disposable income ticking up in the first half of the year to just over 76% (saar), we believe that debt service costs of around 6.5% are providing a buffer to consumers from other demands on their spending power. We are not downplaying the evidence of a degree of distress borrowing, or of rising inflationary pressures and job insecurity but we believe this factor is often disregarded.

Over the years better stock management has seen inventory levels ruthlessly run down with industrial and commercial inventories to GDP falling from 17.3% in 2007 to 12.2% last year and remaining at those levels in the first half of this year. Unfortunately this trend is unlikely to reverse in the near term in the face of high levels of uncertainty.

A word of caution: we are always wary of potential stock overhangs in the first quarter of the new year and hence our advice to manufacturers and wholesalers at present would be to insist on short terms and to be wary of abnormally large orders. Retailers on the other hand will need to be cognisant that many consumers will have to reprioritise spending and that they will have to offer incentives in order to participate in the total expected sales of almost R80.8 billion.

Table – Christmas retail sales analysis

Source: Stats SA; CGIC analysis and forecast