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Sector Chart Book - Retail & Wholesale Trade May 2013

Contacts Sizwe Nxedlana

Chief Economist FNB 011 303 5357 [email protected]

Alex Smith

Analyst FNB Economics 011 303 5919 [email protected]

Consumer spending running out of steam SA WHOLESALE TRADE ■■ The wholesale trade sector performed strongly in 2012, registering real (inflation adjusted) sales growth of 7.9% year-on-year (y/y), the fastest since 2004. This was driven by strong growth in the sales of agricultural raw materials and livestock, fuels and household goods. The graph below depicts the performance of the four largest wholesale trade industries (accounting for over 60% of sales) as well as total wholesale trade in real terms over the past 6 years. Figure 1 Annual wholesale trade sales growth (y/y) y/y Wholesale trade sales

50 40

Wholesale trade in food beverages and tobacco

30 20

Wholesale trade in other household goods except precious stones

10 0

Wholesale trade in solid, liquid and gaseous fuels and related products

-10

Wholesale trade in machinery, equipment and supplies

-20 -30

2007

2008

2009

2010

2011

2012

Source: StatsSA

■■ The wholesale industry recorded a sales contraction in 3Q 2012 on a quarter-on-quarter seasonally adjusted and annualized basis (saar), however a strong recovery got underway in the fourth quarter boosting sales growth to 18.4% saar, the second highest since 2008. On a yearon-year basis quarterly wholesale trade sales recorded stable and relatively robust growth between 2010 and 2012.

how can we help you? Figure 2 Wholesale trade sales growth (%) %

50 40 30 20 10 0 -10 -20 -30 -40 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Wholesale trade y/y

Wholesale trade q/q saar

Source: StatsSA

Table 1 Recent trends in wholesale trade sales

% change year-on-year

Weight (%)

Wholesale sales Total (constant prices*)

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

-0.2

9.7

9.4

3.3

7.4

3.7

3.0

14.5

14.2

7.9

12.9

8.1

5.5

-11.0

-2.7

16.5

-1.9

-3.2

-7.1

Agricultural raw materials and livestock (current prices) 5.7

21.3

16.4

29.5

28.2

22.5

15.9

Wholesale sales Total (current prices) Contract or fee basis (current prices) Food, beverages and tobacco (current prices)

15.5

4.8

15.9

17.8

20.1

6.5

14.9

Textiles, clothing and footwear (current prices)

2.6

13.1

9.2

11.6

2.0

-12.2

0.8

Other household goods except precious stones (current 11.1 prices)

2.0

13.9

13.0

3.9

18.5

13.6

Precious stones, jewellery and silverware (current 1.1 prices)

39.4

59.2

74.2

-26.4

-1.0

21.7

Solid, liquid and gaseous fuels and related products 22.6 (current prices)

12.0

26.4

12.9

7.8

23.6

1.8

Metals and metal ores (current prices)

3.1

-9.6

1.2

-2.0

-4.8

4.6

-2.6

Construction and building materials (current prices)

4.9

-4.5

13.0

10.4

-7.1

7.3

5.9

Other intermediate products, waste and scrap (current 4.2 prices)

-8.5

3.1

4.9

-6.1

-13.5

-4.8

Machinery, equipment and supplies (current prices)

13.1

-14.3

7.3

10.5

-1.9

30.0

10.4

Other goods (current prices)

10.6

14.6

14.2

15.7

16.5

1.4

20.2

Source: StatsSA *Constant prices are current prices adjusted for changes in inflation

SOUTH AFRICAN RETAIL TRADE ■■ After contracting by 3.6% in 2009 inflation adjusted retail sales rebounded strongly in 2010 and 2011, growing 5.1% and 5.9% respectively. In 2012 retail sales volumes continued to grow, but showed signs of slowing, particularly in the second half of the year. ■■ In spite of slightly slower volume growth retailers continued their relatively strong revenue growth (nominal sales) in 2012. However, this revenue 2

growth also tapered off in 2H 2012. ■■ The most recent data suggests that retail sales volumes declined on a seasonally adjusted basis in 4Q 2012 (compared to the third quarter). The 1.4% (annualized) drop in retail sales is only the second quarter-on-quarter decline in three years. The loss of retail sales growth momentum during the course of 2012 was particularly prevalent in the durable goods sub-sector.

how can we help you? Table 2 Annual changes in retail sales

% Year - on - year

2009

2010

2011

2012

Retail sales: Total (Constant prices)

-3.2

5.5

6.1

4.7

General dealers (Constant prices)

-0.5

5.6

6.2

4.0

Retailers of food, beverages and tobacco in specialised stores (Constant -0.9 prices)

1.1

-1.3

3.4

Retailers in pharmaceutical and medical goods,cosmetics and toiletries 1.3 (Constant prices)

10.2

5.5

3.7

Retailers in textiles,clothing,footwear and leather goods Rm (Constant prices) -2.1

7.8

7.0

6.6

Retailers in household furniture,appliances and equipment (Constant prices) -6.1

14.7

10.1

4.8

Retailers in hardware,paint and glass (Constant prices)

-18.1

-1.5

9.0

3.5

All other retailers (Constant prices)

-5.6

4.6

8.7

5.8

Retail sales: Total (Current prices)

4.9

7.0

9.1

8.8

Source: StatsSA

Figure 3 Retail sales volume and revenue growth % y/y

20

■■

15 10 5

■■

0 -5 -10 2003

2004

2005

2006

2007

2008

Retail sales volume

2009

2010

2011

2012

2013

Retail sales revenue

Source: StatsSA

■■ The most recent data shows a slight retail sales rebound in February 2013 to 3.8% y/y from a low level of 2.2% y/y in January. However, the underlying data was mixed as food and beverage sales fell for a second consecutive month and retailers of appliances and furniture reported the largest sales decline in over three years (-7% y/y). Meanwhile, clothing and footwear sales jumped to a six month high of 14.3% y/y.

■■

■■

usually perform particularly well during an economic upswing phase as consumers restock on big ticket items that they put off buying during the prior period of economic weakness It is clear from the figure below that the 2010 – 2011 period was a prime example of durable goods restocking following the global financial crisis Durable goods sales growth moderated from 18% y/y in 4Q2011 to 7.1% y/y in 4Q 2012, the slowest growth in almost three years. A slowdown of this nature is typically an indication that consumer spending is under pressure and confidence is low. Much of the growth in durable goods sales in 2012 appeared to be funded by debt as installment sales credit and credit granted through overdrafts and credit cards (other loans and advances) grew near four year highs in Q4 2012 and far outstripped total credit growth. Meanwhile the household deleveraging that occurred in 2011 was slowly reversed in 2012 even as debt servicing costs fell.

Figure 4 Durable goods sales (y/y) %y/y

30

RETAIL SUB-SECTORS Durable Goods | Growth on a downward trajectory ■■ Durable goods have a long lifespan and are therefore purchased irregularly by consumers. Examples of durable goods include furniture, appliances, personal transport equipment, computers, audiovisual equipment and jewelry ■■ Durable goods sales tend to be highly cyclical and

25 20 15 10 5 0 -5 -10 -15 -20 -25

2000

■■

Source: SARB

2003

2006

2009

2012

Durable goods sales

3

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vulnerable to Rand weakness - which is a key risk this year

Figure 5 Credit growth %y/y

40 35

Figure 7 CPI changes by type of good (y/y)

30 25

% y/y

20

14

15 10

12

5

10

0

8

-5 -10 2000

6 2002

2004

Total loans and advances

2006

2008

Other loans and advances

2010

2012

Instalment sale credit

4 2 0

Source: SARB

-2 -4

Semi-Durable Goods | Potential price pressures ■■ Semi-durable goods can be used multiple times, but typically have a smaller lifespan and lower value than durable goods. Examples of semi-durable goods include: clothing, footwear, motorcar parts and tyres, books, sporting goods and household decorations ■■ As semi-durable goods tend to be less expensive and have a shorter replacement cycle than durable goods, their sales patterns tend to be less cyclical. Figure 6 Breakdown of expenditure on semi-durable goods (based on 2012 values)

5% 7% Clothing and footwear Household textiles, furnishings, glassware, etc.

15%

Motorcar tyres, parts and accessories

58% 14%

Recreational and entertainment goods Miscellaneous goods

2009

2010

CPI for durable goods

2011

2012

CPI for semi durable goods

2013

CPI for non-durable goods

Source: StatsSA

Non-Durable Goods | High inflation ■■ Non-durable goods include: food, beverages, fuel and pharmaceutical products. ■■ Sales of non-durables tend to be far more resilient to economic fluctuations than other goods types. However, sales growth trends are typically the same as in other goods segments. ■■ Inflation in the non-durable goods segment has been increasing in excess of the upper end of the South African Reserve Bank (SARB) CPI target range (6%) since mid-2011. The recent upward pressure has been caused predominantly by rising food and petrol prices, which are due mainly to droughts (in the case of food), geopolitical tensions (in the case of oil) and a weakening Rand (in both cases). Figure 8 Semi-durable and non-durable goods sales growth % y/y

20

Source: SARB

15 10

■■ In 2012, the best performing semi-durable goods segments in terms of real sales: were recreational goods (+7.4% y/y), home wares (+6.8% y/y) and clothing and footwear (+6.2% y/y). ■■ Strong installment sales and other credit growth along with well contained prices in the semi-durable segment supported sales in 2012 ■■ Lively competition in this segment has assisted in keeping prices down however, as many semidurable goods are imported, prices are likely to be 4

5 0 -5

2007

2008

2009

Semi durable goods sales

Source: SARB

2010

2011

2012

Non-durable goods sales

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What is behind the recent slowdown in consumer spending? ■■ Weaker growth in disposable income as a result of slower wage growth and smaller increases in government grants ■■ The increased prices of largely unavoidable purchases (in the non-durable space) has led to a reduction in real disposable income, therefore significant price growth in the segment has adversely impacted sales of discretionary items (in the semidurable and non-durable space) ■■ Weak employment growth of late and in fact job losses in the last quarter of 2012 ■■ Reduced consumer confidence leading to fewer discretionary purchases

role in the drop in overall consumer confidence. Nevertheless recent data has shown a moderation in real income growth with lower income households bearing the brunt of higher administered prices and a constrained labour market. Figure 10 Constituents of the consumer confidence index Net Balance

40 30 20 10 0 -10 -20 -30

Figure 9 Employment in South Africa

2007

2008

2009

2010

2011

2012

2013

Economic position in SA during next 12 months

000's

Financial position of households during next 12 months

14200

Rating of the present time to buy durable goods

14000

Source: BER

13800 13600 13400 13200 13000 12800 12600 12400

2008

2009

2010

2011

2012

2013

Employment: Total

Source: StatsSA

The latest survey results from the consumer and the internal trade sector: ■■ South Africa’s consumer confidence index (CCI) fell in 1Q 2013 to the lowest in 9 years. All three of the sub-components of CCI declined notably. The economic outlook index fell from -7 to -11, indicating that consumers view on the performance of the economy over the next 12 months has deteriorated. The financial position index fell from +12 to +6, suggesting that fewer consumers are expecting income growth in the near term. While, the time to buy durable goods index fell from -12 to -15 as a larger majority of consumers do not consider the present time appropriate to make a large purchase. There does appear to be a slight disconnect between consumers personal finances and their desire to make large purchases, which suggests that pessimism over recent news flow and the general economic climate has played a large

■■ Business confidence in the retail sector moderated from 54 in 1Q 2012 to 50 in 1Q 2013. This indicates that 50% of respondents were satisfied with prevailing business conditions in 1Q 2013. However, the underlying data paint a concerning picture with regards to the current state of the retail sector. The latest retail survey shows that the largest net majority of respondents in over three years recorded a sales volume decline, while a significantly larger majority saw a lower profit in the quarter. This is perhaps not surprising as a significantly larger majority of retailers recorded purchase price increases, than selling price increases. The theme of margin pressure is likely to continue well into 2013 based on the most recent guidance from business Figure 11 Selected underlying constituents of retail business confidence Net Balance

60 40 20 0 -20 -40 -60 -80 2003

2004

2005

2006

2007

Change in business conditions

2008

2009

2010

2011

2012

2013

Growth in volume of sales

Overall profitability of the business

Source: BER

5

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■■ Of the underlying retail sectors non-durable goods retailers were arguably the worst off in 1Q 2013 as a significant majority saw sales and profitability declines. Meanwhile, the semi-durable goods space - which has been performing strongly over the past two years – recorded a sharp drop in confidence and a net majority of businesses reported lower profits for the first time in two and a half years. However, the majority of businesses in the sector did continue to record increased sales volumes (albeit by a much smaller margin). Finally, the durable goods segment was the only one to report an increase in confidence; however this comes from a low base. The segment also reported a slight net increase in sales volumes and a smaller net majority of those surveyed reported a profit decline. Figure 12 Selected underlying constituents of retail business confidence Net Balance

100 80 60 40 20 0 -20 -40 -60 -80 -100 2003

2004

2005

2006

2007

Semi-durables: Growth in the volume of sales

2008

2009

2010

2011

2012

2013

Non-durables: Growth in the volume of sales

Durables: Growth in the volume of sales

Source: BER

■■ In contrast to retailers, wholesaler confidence improved by 14 points to a five year high of 71 in 1Q 2013. Improvements occurred across the board, but it was particularly encouraging to note a strong rebound in the volume of sales and orders placed as well as the level of employment in the industry. Furthermore the largest majority of wholesalers in over four years saw a rise in average selling prices, as the smallest majority of respondents reported lower profit since 2008.

OUTLOOK FOR WHOLESALERS

RETAILERS

Inflation is expected rise through the first half of this year and peak above 6% in the third quarter. This is likely to prevent the South African Reserve Bank (SARB) from cutting interest rates again, however there is a chance of a rate cut if growth weakens substantially or inflation moderates ahead of expectations. We anticipate slower employment, wage and social grant growth from government this year as it has committed to moderating growth in current expenditure and faces credit ratings downgrades if it doesn’t. The private sector is likely to add few, if any, jobs in the near term as a result of constrained confidence and high wage settlements last year. However, the elevated wage settlements should partially negate the effects of weak jobs growth on overall consumer spending. Finally, we are expecting lenders and regulators to tighten credit criteria - especially in the unsecured space in 2013 and as a result credit advances are likely to be less supportive of consumer spending. ■■ The above factors lead us to believe that consumer spending is moving into a phase of weaker growth. Notwithstanding what appears to have been a rebound in durable goods sales in the first quarter, we anticipate that durable and semi-durable goods retailers will come under pressure (from a margin and revenue perspective) during the middle part of this year. This is as a result of the sensitivity of these two sectors to discretionary consumer spending and credit extension growth, as well as indications from the latest consumer confidence survey, and the latest guidance from business. Sales of discretionary nondurable goods may also come under pressure as consumers grapple with rising prices of basic items such as food and fuel. ■■ Based on the latest business surveys it appears as if wholesalers are currently performing better than retailers. However if our expectations for slower consumer spending growth are correct, then it is likely that we will see a slowdown in wholesale activity in 2013 as well.

AND

■■ We anticipate sub-par GDP growth this year.

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