South Africa Retailers Under Heavy Strain

South African retailers across the board are taking strain, with consumers under pressure due to an unprecedented VAT increases and record fuel prices.

The going is not going to get any easier any time soon for consumers with South Africans expecting a fuel hike next week, thanks largely to a softer rand against the US dollar, IOL reported.

Petrol is expected to increase by between 23 and 25 cents a liter in September, with diesel rising by around 28 cents and illuminating paraffin by 17 cents.

Retail sales growth slowed from 1.9% year on year in May to 0.7% in June. This was much weaker than the 2.2% market consensus, according to recent data by Statistics South Africa.

Ron Klipin, a senior analyst at Cratos Capital, said,  “These factors have impacted the listed Johannesburg Stock Exchange retail counters, where deflation has had a major impact on food retailers, revenue growth and profits.”

A  prime example of this had been the Shoprite group, which had in addition to deflation has had to subsidize food prices in excess of 100 items to assist their lower LSM (Living Standards Measure) clients.

These interventions included R5 ($0.34) meal subsidies, he said.  In its results for the year to July 1, the retailer reported that diluted headline earnings a share declined by 3.8% to 968.7 cents a share. In addition, the group faced a perfect storm scenario due to hyperinflation in Angola, as well as strikes.

Shoprite saw the food inflation decline from 7.4% to around 0.4%. Rising unemployment was also a factor in weak results for South African retailers.

At the higher end of the income spectrum, the Checkers division recorded sales increases in excess of 8%. This showed that there was a certain degree of resilience in this sector of their market, Klipin said.

Meanwhile, Woolworths chief executive Ian Moir said, 2018 had been a difficult year for the retailers. “Significant costs and disruption from transformation initiatives in David Jones and poor performance in our fashion business in South Africa have led to a result for the group that is disappointing. This was exacerbated by challenging economic and trading conditions in both markets,” he said.

Woolworths in the 26 weeks to end December endured a double hit with a R7 billion write-down of David Jones in Australia.  

Klipin said again, the difference was in their food division serving LSM 8-10, which proved to be a star performer.

Klipin said Massmart was likewise impacted by deflation in all their categories including durables and foods.  In the six months to end July 1, Massmart, Africa’s second largest retail group, with stories such as Game, Makro and Builders’ Warehouse, came under pressure. During the period Massmart reported that its like-for-like sales increased by 1.9% to R41.6 billion.

In its results, Massmart cautioned that the current market weakness and deflation in the domestic economy was expected to persist.  

  Clumsy and Confusing Land Debate

It is ironic that despite repeated reassurances from President Cyril Ramaphosa that any land expropriation would not–in his words–undermine future investment in the economy, it is the very economy now that has already been undermined, Fin24 reported.

The clumsy and confusing way the land debate has been handled has not only weakened the currency, but clearly presents an obstacle to investor certainty–a critical element required to attract foreign direct investment.

The ANC’s inability to articulate a more nuanced and responsible view has caused a downturn in the domestic property market, is making domestic investors again sit on their cash stockpiles, and certainly will create unnecessary consternation among a raft of foreign investors.

The problem for Ramaphosa is that his inability to control and lead the land debate is now playing itself out in the unrelenting raft of daily negative economic indicators.

Ramaphosa is fast realizing that he has, in large part, lost control of the debate. And his heavy-handed approach in clawing back leadership by way of a late-night television appearance simply added fuel to the spreading fire.

  Need for Broad Competition

Recently, the International Monetary Fund in its latest country focus note on South Africa said that the country needs to dismantle the high levels of concentration in the economy to ignite growth and to reduce the high cost of internet connection.

Ana Lucia Coronel, who headed the IMF team for South Africa, said: “The recommendation of IMF staff is to increase competition in all sectors, so that more private companies, domestic and foreign, could invest and compete in the production of services–not only in telecommunications, but also in energy, transport, and other sectors”.

The IMF also said that the use of technology still has a long way to advance in South Africa, given the potential of the economy.  The lender said the cost of internet in the country is high and the quality is low, because there are very few competitors.

South Africa’s economy is known to be characterized by high levels of concentration–spatially as well as industrially.

Research produced by the Industrial Development Think Tank found that monopolistic firms have less of an incentive to invest, since they can earn economic benefits by protecting their market share rather than upgrading their product offering.

The study also found that the South African economy requires a broader competition policy, as part of an industrial policy, which facilitates the entry and expansion of businesses, especially black entrepreneurs, and reduces barriers to entry.