Consumer crunch: How retailers should up their game

In recent years, South Africa’s consumer market has grown to approximately 9m households, yet this substantial increase has not translated into a considerable increase in consumption.  

In fact, according to a study conducted by global management consultancy group McKinsey & Company on South African consumer behaviour, private consumption in the country has grown only 1.6% in the past year – considerably slower than in Africa’s other major economies.  

The latest FNB/BER Consumer Confidence Index, which was released early in July, painted an even gloomier picture: growth in real consumer spending will likely drop to near 0% in 2016.  

In addition, consumer inflation increased to 6.3% year-on-year in June 2016, which puts consumption under further pressure.  

Spending patterns are a-changin’   

The McKinsey survey, titledSouth Africa’s Cautious Consumer, showed that local consumers are concerned about financial prospects and are therefore reining in spending.  

Close to 70% of the 1 000 survey participants said they worry about imminent job losses and more than half live from pay cheque to pay cheque.

These respondents all indicated they’re cutting back on spending, delaying purchases and shopping around for the best deals.  

In the report, four consumer trends emerge that could give an indication to retailers as to how they could position themselves in these tough times. 

• Consumers are proactively looking for savings, by comparing prices, looking for sales, delaying purchases and shopping at several stores to find the best deals.  
• Brand loyalty is closely related to the right price and consumers said they will shop around at different retailers to find a particular brand at the lowest price. Others buy these brands in smaller quantities or delay the purchase until the product is available at a discount price. 
• Down-traders don’t look back. Altogether 21% of survey participants said they started trading down – buying cheaper products or private-label brands instead of their preferred ones. Of the ones that traded down, 57% said they didn’t regret it and would stick to the less expensive products.  
• Consumers have shifted from buying at small, independent retailers to big-name retailers, including discounters and hypermarkets, where they expect lower-priced goods.  

Winners and losers   

The analysts finweek spoke to are of the view that consumers are likely to remain under pressure – at least for the next 12 months, which means tough times are also in store for SA’s retailers.  

There are two signs that retailers are under pressure, says Reuben Beelder, fund manager at Gryphon Asset Management. 

“Cash sales are picking up faster than credit sales, which generally means consumers are ‘maxed out’.”

Another indication is when like-for-like sales [sales that exclude the effects of new stores, acquisitions and expansion activities] are in line with inflation.  

“When like-for-like growth is less than inflation, there’s a strong possibility that sales volumes are negative,” says Beelders.  

Spar, Woolworths, Truworths and TFG all acquired international operations recently, and Beelders believes the fact that the rand has strengthened somewhat against the British pound will determine whether the acquisitions are considered as successful in the near term. 

When one compares Woolworths’ recent trading update to the previous period in 2015, there seems to be a slowdown in food sales, says Beelders.

In its recent trading update, the retailer said food sales in the current financial year climbed by 11.9%, compared to 13.5% in the previous reporting period.  

“Could it be that customers are trading down to Checkers? We think this is likely,” says Beelders.   

For this reason, Gryphon has a preference for Shoprite stocks, premised on the likelihood of customers trading down.

“We believe both the Checkers and Shoprite brands benefit from the trading-down phenomenon.”  

In the clothing space, Beelders says retailers could reflect better value in future and his preference in this sector is Truworths.  

Meryl Pick, equity analyst at Old Mutual Investments, says SA’s clothing retailers performed “reasonably well” up until December last year.

“More recently we’ve seen trading updates from Woolworths and Truworths that could indicate that things have started to slow down.  

“In the last six months, with the exclusion of new stores, we’ve seen their numbers decreasing from in the teens to mid-single digits.

And stores that provide credit, such as TFG [previously The Foschini Group] and Edcon, will also struggle as the new obligatory credit and affordability checks will impact their ability to lure new account holders,” she says.  

This is a shortened version of an article that originally appeared in the 4 August edition of finweek. Buy and download the magazine here.