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Send  Share  RSS  Twitter  21 Sep 2011

RETAIL: Retail Sales Improve But Business Confidence is Subdued


Recent Gauteng Business News

Results from the latest Bureau for Economic Research (BER) / Ernst and Young Retail survey suggest that retail sales growth remained solid during the third quarter of 2011 and that the overall profitability of retailers improved. Despite these positive developments, the business confidence levels of retailers did not increase as one might have expected. The percentage of retailers reporting that they are satisfied with prevailing business conditions increased by only one point to 48 during 2011Q3, after slumping from 58 to 47 during 2011Q2.

According to Derek Engelbrecht, Retail and Consumer Products Sector leader at Ernst and Young, relatively subdued confidence levels suggest that retailers are concerned about the outlook for retail sales during the fourth quarter of 2011 and beyond. Nevertheless, retailers remain substantially more optimistic about prevailing business conditions compared to wholesalers, manufacturers and building contractors – the BER’s survey showed that less than 40% of respondents in these sectors were satisfied with prevailing business conditions during the third quarter of 2011.

Retail Sales Increase in Semi-Durable Goods

Retailers in semi-durable goods (e.g. textiles, clothing and footwear) saw the highest volume growth during 2011Q3. Boosted by very low interest rates and an uptick in retail store credit growth, the vast majority of semi-durable goods retailers reported that sales volumes were even higher compared to the impressive volumes recorded during the 2010 Soccer World Cup months. Furthermore, semi-durable goods retailers have also been able to increases their selling prices. “While rising wages and high cotton and other commodity prices have also led to a substantial increase in purchasing prices, the combination of strong volume growth and higher selling prices saw a significant improvement in the profitability levels of semi-durable goods retailers,” Engelbrecht said. The BER’s index for the overall profitability of semi-durable goods retailers is currently at a decade high.

Retailers in non-durable goods (e.g. food, beverages, tobacco, cosmetics and pharmaceuticals) also reported higher sales volumes compared to 2010Q3, but volume growth in this category remained lower compared to that of semi-durable goods. In addition, input prices in the non-durable goods category are still increasing at a substantially higher rate compared to selling prices, and hence, profitability remains under pressure. “While rising food prices should bolster turnover growth, the slow pace of job creation in South Africa, coupled with lower real wage increases compared to last year, will in all likelihood weigh on non-durable goods sales volumes during the months ahead,” Engelbrecht said.

Durable Goods Retail Sales Fluctuate

In the durable goods category, sales of furniture and household appliances remained strong during 2011Q3, but hardware, paint and glass sales contracted. According to Engelbrecht, “The poor performance of hardware sales volumes correlates with the slump in the domestic property market and the fact that the building and construction industry is still in the doldrums.” On the other hand, it appears as though retailers in furniture and household appliances are able to sustain high volume growth by lowering their selling prices and improving affordability.

According to Statistics South Africa, the growth in retail sales volumes eased from 5.7% year on year during 2011Q1 to 4.1% y-o-y during 2011Q2. While the results from the latest BER/Ernst and Young retail survey suggest that sales growth still remained sturdy during 2011Q3, most retailers report that business conditions have started to deteriorate and therefore expect volume growth to ease in coming months. “Given the recent hikes in food and fuel prices, coupled with lower real wage increases, as well as due to the high base created by the strong growth in retail sales during 2010, retail volume growth is expected to slow further over the next six months. However, rising food and clothing prices in particular should underpin turnover growth with retail sales in the retail sector,” Engelbrecht concluded.

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