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Local fashion retailers take a knock, multinationals here to stay - analyst

Oct 29 2017 14:43
Lameez Omarjee

Johannesburg – Despite an uptick in the retail sector for the first half of the year, clothing and fashion retailers are still under pressure, say analysts.

Speaking at a briefing on EY’s consumer products and retail analysis report for the first half of 2017 this past week, Derek Engelbrecht, consumer products and retail sector leader, explained that although it is too soon to celebrate any successes in the sector, it is no longer in the “doldrums” as it was a year ago.

Africa Analyst Graham Thompson who shared insights on the return of equity (ROE) of the sector, which was down 3.8 percentage points to 31.8%, said it was still strong compared to returns in other sectors. “This is still a really strong number, of you compare that other returns with other sectors, that is holding up quite robustly,” he said.

ROE for fashion retailers specifically was down 8.3%, reflecting the pressures of consumers and the weak economy, he explained.

During the period, Stuttafords “folded” reflecting the weak economic environment and the “global demise” of the department store, said Thompson.

Local fashion retailers had also exited the high-end product markets as it had not brought the returns that were expected. On the flipside strong global competitors have been entering the local space and have targeted the middle and lower-end of the market, he said.

Engelbrecht echoed views that local fashion retailers were under pressure by large multinationals which have now become household names. “These multinationals are here to stay for the long run,” he said

Specialty retailers perform well

Other retailers which reported slowing ROEs include grocers (down 5.3%) and general retailers (down 1%).

Specialty retailers however reported an improvement in ROE by 4.1%. This may be because specialty retailers are a niche and can respond to the unique needs of consumers, explained Engelbrecht. “They have something competitors do not have,” he explained. “If you have a unique service experience or offering, it is easier to compete than on a generic basis where you compete on price.”

Revenue growth outpaced profit growth. The sector’s revenue growth from the previous year was above inflation (7.1%), profit margins remain under pressure having only grown 4.9%.

This is because retailers are resorting to promotions and mark downs in order to boost sales volumes, explained Engelbrecht.

Fashion retailers also underperformed in the revenue space, with growth by 4.2%, compared to specialty retailers which grew 9.7%, and DIY/Home retailers which grew 6.6%. General retailers’ revenue was up 10.8% and that of grocers was up 5.9%. Overall revenue generated by the sector was up R342bn compared to the previous year, where it was R318bn.

Profit generated by the sector improved to R13.2bn, compared to R12.6bn reported in the previous year. Growth was up 4.9%, compared to the 0.4% growth reported in the second half of 2016.

Specialty retailers’ profit grew 5.2%, grocers improved profit by 10.8% and general retailers’ profit grew 13.9%.

DIY/Home retailers profit contracted 1.5%, and that of fashion retailers contracted 0.5%.

Understanding consumers

The pressure consumers are facing is carried through to profits and ultimately ROE, the report indicated. Retailers are now focussing on innovation that relies on data to understand consumers better, explained Engelbrecht.

This means in future promotional items will be less board-based and be directed to consumers on a personal level. Retailers are looking to use IT to drive this strategy. For example, through loyalty programmes, retailers can get data on consumer behaviour, to then tailor promotional products based on history of their shopping activity.

Retailers are also considering omni-channel offerings to enable consumers to shop online, on mobile, even at bricks and mortar stores, he said. 

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