Facing up to the facts: Are we expecting too much from the 2010 World Cup?

Cadiz Securities research analysts Shamil Ismail and Jasmine Lin are asking us to be more realistic in our expectations of the 2010 FIFA World Cup. They have compiled a detailed document  to support their view that mounting football fever notwithstanding, the impact of the 2010 FIFA World Cup on South African retail will be far more muted than much of the current local optimism would suggest.

Looking first at local market conditions, they predict that consumer spend may grow by no more than 3% this year, taking into account such factors as the employment situation, changes in social grants, debt service costs, changes in oil and electricity prices, as well as taxes. Their projections indicate that job losses are far from over and that even with some economic recovery during Q2, the net effect will still be average job losses of 334 000 for 2010, to erode R3,5bn from the national consumer wallet.
Higher likely taxes in next month’s (February) National Budget to address the budget deficit could see the tax charge for consumers increasing by R10,4bn this year, with higher income groups most likely to shoulder the greater tax burden. It is also the highest income groups who do most of the spending, despite their size relative to the total population. We know that LSM 9 and 10 currently account for 41,2% of gross household income, with LSM 6 to 8, another 41,7%. In contrast LSM 1 to 5, although accounting for 48% of our population, generate fractionally more than 17% of household income.

Then there’s the anticipated 12% increase in the rand fuel price from R7,17 a litre in 2009 to R8,06 this year. Not to mention the 35% rise in electricity tariffs, which could shave off a further R7,6bn from consumer spend. Shamil and Jasmine also note that even though there might be wage increases for some, the cumulative drag of higher fuel prices, taxes and electricity will minimise any real positive impact.

Their research also explores the likely influence of increased tourist volumes on retail spend. Instead of comparing the 2010 World Cup with the 2006 games in Germany as if often the case, they focus their attention instead on the 2002 tournament in South Korea. To do so is more appropriate in their view, given the closer parallels in the prevailing economic mood, distance from international markets and levels of economic development.
They observe that the decline in intra-continental visitors to South Korea was not sufficiently offset by increased visitor traffic from countries further afield. They expect similar patterns for the 2010 World Cup, with visitors from Africa , who comprise the bulk of off-shore tourists to South Africa, possibly choosing to avoid the country during the games. Moreover, in light of the recession, a stronger rand could curtail the volumes of inbound tourists to South Africa.
According to their calculations, even if SA Tourism’s target of 10 million visitors is achieved this year, and assuming there is an average per capita tourist retail spend of US$500, the higher visitor numbers would contribute no more than an additional R803m to retail spend in 2010, which would represent an extremely modest 0,2% increase to Stats SA retail growth figures.

In addition, there’s the reality check of foreign World Cup ticket sales to date. To reach the target of 10 million visitors this year, inbound tourism volumes will have to grow by 8,3%, or 764 000 visitors. So far, about 335 000 World Cup tickets have been sold to foreigners, with a further 125 000 subscribed for in the third phase of ticket sales, according to a Financial Mail report earlier this month (January). Assuming fans will attend four games on average, this translates to just 115 000 foreign visitors for the World Cup.

At the same time, they are expecting retail share prices, which they consider to be currently more than fully priced, to de-rate on a 12-month horizon.