Trends

The year ahead…

You’ll have to be an illiterate living on an island without radio or TV coverage to be unaware that the world is in an economic mess. Global performances of most international brands are described with adjectives like disappointing, down, dropped, slipping, slow or slump. Reports of retail holiday sales are equally negative.

In the US, Europe and UK retailers are reporting their worst season in many years. In most categories the question is not whether sales are down, but rather by how much.

Yet, in SA the descriptions of the economic and retail outlook sound decidedly more hopeful. And the good news is that there are many reasons why your customers should have more spending power this year than in the latter half of last year.

» The basic crude fuel price had dropped from an average of R7.30/litre in July last year to R3.35/litre in February (respectively more than R10/litre and R6/litre at the pumps) — nearly R4/litre more in the pockets of consumers. Or, R200 more spending money every time you fill a car tank that takes 50 litres of fuel;
» The recent interest rate cut announced in February also means more money in the pocket of consumers. For example, customers with a bond of R750 000, will have to pay roughly R550 less per month than in December, when the prime bank rate was cut from 15.5% in June to 15%. Therefore, more spending money in your customers’ pockets;
» The 2009 budget promised R13.6-bn of tax relief for individuals in this year’s tax period — especially people earning less than R150 000 a year (R12 500 per month) will benefit as they will receive about 50% of the tax relief during 2009/2010;
» Each R1 of the R787-bn infrastructure spending planned for in the 2008 budget will contribute at least R2 to the GDP say economists, as it will help create and maintain jobs. The R6.4-bn for public transport, roads and rail networks, R4.1-bn for schools, clinics etc, R5.3-bn for municipal infrastructure and bulk water systems, R176-bn underwriting Eskom debt and R50.9-bn for transport infrastructure will help us adjust for the impact of the global economic crisis, said Finance Minister Trevor Manual;
» The Rand/US$ exchange rate has steadied at an average of under R10/$, dispelling fears of an out of control spiral and giving importers reason to breathe again;
» Although still above the Government’s ideal 3-6% rate, inflation is coming down, dispelling last year’s fears of an uncontrollable spiral. December’s CPIX (consumer inflation less mortgage costs) was at its lowest level since March 2008, dipping from 12.1% in November, and slowing down to 10.3% year-on-year in January. All-items CPI slid more-than-expected to a one-year low of 9.5%. CPIX peaked at 13.6% in August last year.

According to the 4th Quarter Inflation Expectation Survey by the Bureau for Economic Research (BER) at the University of Stellenbosch, expectations are that inflation will remain under 10%. CPIX inflation expectations for 2009 increased by 0.1 percentage point to 8.2%, whilst the expectations for 2010 declined by 0.2 percentage points to 7.2%. This is the first time since the 1st quarter of 2006 that CPIX inflation expectations declined.

The inflation expectations for 2010 declined because the expectations of the trade union officials declined from 8.5% to 7.7%. Analysts and business people held their expectations unchanged at 5.9% and 7.7% respectively. Of the three groups, only analysts anticipate CPIX inflation to be within the 3-6% target range by 2010.

These positive indicators, however, do not mean that all SA retailers are immune to the worldwide slow down. Retail trade sales at a constant price for the first 10 months of 2008 decreased 2.2% compared to the same period in 2007. In October 2008 alone sales dropped by 2.3% compared to October 2007.

But, remember, the period between January 2004 and January 2007 was an unprecedented boom time for retailers. On average, the real annual sales at SA retailers increased by 7.6% per annum from January 2004 to October 2007 (well above the inflation rate for the period). On the graph (click here for the graph) one can clearly see the increase in real sales, together with the spikes during the Christmas holiday season in December of each year. The trend line, however, reached its top in October 2007 and started turning negative from then on.

However, while new vehicle sales, representing sales of durable goods, has been experiencing a decline from about a year earlier, it is interesting to note that retailers selling textiles, clothing, footwear and leather goods have not yet felt the effect of the downturn. Their sales for the 12 months ended October 2008 is 13.6% higher compared to the same period a year ago, still ahead of the consumer price index, which was 12.1% in the same month (click here for the graph).

No wonder that SA’s consumers were the most optimistic in a Deloitte & Touche survey of consumers in 20 countries in Europe, the Middle East and Africa conducted in the last quarter of 2008. When surveyed, they planned to spend 12% more on year-end holiday shopping. But, on a more sobering note, 57% of the South Africans surveyed expected the economy to deteriorate this year, leaving them with less buying power. But, remember, the survey was done before the petrol price dropped and the repo rate was cut.