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Retail sales growth set to lose steam…

25 March 2014 Derek Engelbrecht, EY

Price hikes partly make up for a significant slowdown in volume growth during 2014Q1.

Results from the latest EY / Bureau for Economic Research (BER) retail survey suggest that, following a slight reprieve during the festive season, the growth in retail sales volumes resumed its downward trend during the first quarter of 2014.[2] During 2013Q4, results from the EY/BER retail survey correctly signalled that the growth in retail sales volumes had accelerated during the festive season. Official retail sales data released by Statistics South Africa on 19 March 2014 showed that the growth in retail sales volumes quickened from a 3½ year low of 2.1% year-on-year (y-o-y) during 2013Q3 to 2.8% y-o-y in 2013Q4 and accelerated further to a surprisingly strong 6.8% y-o-y in January 2014. However, the results from the latest EY / BER retail survey suggest that volume growth slowed significantly during February and March 2014.

According to Derek Engelbrecht, Retail and Consumer Products Sector leader at EY, the deceleration in retail sales growth during 2014Q1 was broad-based, with retailers in non-durable goods (e.g. food, beverages, groceries, pharmaceuticals and cosmetics) and semi-durable goods (e.g. clothing, footwear, sporting equipment, CDs and toys) now joining long-ailing furniture and household appliances retailers in reporting weak sales growth.
Engelbrecht noted that "Wounded by a substantial slowdown in unsecured credit extension, coupled with waning real disposable income growth and a sharp decline in consumer confidence levels, furniture and household appliances sales volumes contracted by 4.8% during 2013. The results from the latest EY/BER retail survey suggest that the miserable run for furniture and household appliances retailers continued during 2014Q1, although the rate of decline may be easing." The 50 basis points hike in the prime interest rate in January 2014 would have dealt another blow to this credit-sensitive sector, whilst hefty price hikes on the back of a weak Rand exchange rate are now also starting to weigh on imported electronic goods sales volumes.

In fact, durable goods retailers (e.g. furniture and household appliances, hardware, paint and glass) were not alone in reporting a significant uptick in their selling prices during 2014Q1. The BER's indices measuring overall purchasing price (i.e. input costs) and selling price increases in the retail sector rose substantially to reach 5-year highs during 2014Q1, with retailers across all sub-categories reporting considerable cost pressures and notable hikes in their selling prices. "The increase in the BER's index for retail selling prices corresponds with the marked acceleration in the CPI inflation rate, from 5.4% in the final quarter of 2013 to 5.9% in February 2014, and points to further upward pressure on inflation in coming months," said Engelbrecht. Engelbrecht pointed out that the consumer goods wholesalers and manufacturers that participate in the BER's business surveys also reported higher than anticipated hikes in their selling prices during 2014Q1, suggesting pervasive price pressure throughout the retail supply chain.

Trading around R10,80 to the US dollar, the Rand has depreciated by 40% over the last 2 years, putting substantial upward pressure on the cost of imported goods such as household appliances, electronic goods, sporting equipment, toys, CD's, and clothing & footwear, as well as the petrol price and transport costs. So far, subdued domestic demand and low global inflation have helped to limit the pass-through of these cost pressures to retail selling prices. However, the results from the latest EY/BER retail survey now clearly point to more significant increases in retail prices. At this stage, it is not clear whether this will turn out to be a once-off increase in the price level or the start of accelerating price increases. Contrary to history, rand depreciations and higher selling price increases in the BER’s retail survey have not led to substantial increases in measured inflation since the 2008/9 recession (at least not yet).

Whereas furniture and household appliances sales volumes had already been in the doldrums during 2013, hardware, paint and glass retailers and semi-durable goods retailers recorded remarkably strong volume growth last year. Engelbrecht said that "Bolstered by a gradual recovery in the building and construction sector, hardware retailers continued to report robust sales growth during 2014Q1. However, the majority of semi-durable goods retailers surveyed by the BER reported a deceleration in sales growth in recent months." Hardware, paint & glass retailers and retailers in textiles, clothing & footwear were the mainstay of sales growth in the retail sector during 2013, with robust volume growth measuring 6.9% on average in 2013. Excluding these two retail sales categories, the growth in retail sales slumped to a mere 1.1% during 2013 (i.e. the average growth for all other retail sales categories), and the latest EY/BER survey results suggest that volume growth remained weak during 2014Q1.
Given subdued retail sales growth, coupled with relentless downward pressure on profitability levels, it is not surprising that the confidence levels of retailers remained very low during 2014Q1. Only 39% of respondents to the EY/BER survey reported that they are satisfied with prevailing business conditions in the retail sector, down from 40% in 2013Q4 and 49% in 2013Q3. The majority of retailers surveyed by the BER expect a further deterioration in sales growth during 2014Q2. "Given low consumer confidence levels, rising inflation, a slowdown in household credit extension, lost income due to strikes and the poor job creation prospects for the South African economy in the near term, retail trading conditions are set to remain very challenging in coming months,” said Engelbrecht.

[1] The fieldwork of the first quarter survey was conducted between 3 February and 3 March 2014.

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