SA retailers to face tough trading conditions this year due to hamstrung consumers and the weak economy

South African retailers might face a tough 2023 as a global recession might be on the cards, load shedding remains prevalent and inflation is still rising.

In 2022, the retail sector had to deal with several headwinds.

Anchor Capital investment analyst Zinhle Maphumulo said the near-term outlook for the retail sector remained challenging, given the macro outlook, and because last year’s trading was marred with headwinds.

Maphumulo said the South African retail sector in 2022 was mixed. The initial six months period was good, as there was little evidence yet of elevated inflationary increases.

“As the year went on, you had increasing interest rates. You had increased food inflation as a result of increased commodity prices. You have increased petrol prices, diesel prices, and that’s impacted the consumer negatively as incomes started to become constrained, and as a result of those things that I’ve mentioned, all of those things really impacted consumer disposable incomes, negatively,” she said.

Maphumulo said the consumer’s disposable income contracted or became more constrained, and discretionary product retailers were more impacted that food retailers.

“So like your apparel retailers, your general merchandise retailers were negatively affected, and we start to see some of the retailers post weak top-line growth, and that was indicating declining volumes towards the end of the year, and that's because of the macro environment,” Maphumulo said.

Maphumulo said going into 2023, most retailers in their most recent results had reported a tough near-term outlook given the headwinds ahead.

“Most of them are citing a constrained consumer and load shedding is a big thing for the retailers. It’s affecting them on the demand side because when there is load shedding people do not go to malls, and so footfall decreases significantly, and that affects demand or volume,” she said.

Retailer Woolworths said in its results that the global macro-economic outlook remains challenging, with rising inflation and interest rates, continued supply chain challenges, and ongoing volatility and uncertainty

The group said in South Africa, consumption spending faced the additional headwinds of high unemployment and severe energy shortages.

In its latest integrated report, Shoprite said the combined impact of Russia’s invasion of Ukraine, a looming recession in the US, and with Covid-19 still a factor to varying degrees in different global geographies, the global backdrop is not supportive of growth.

“While much of this has been factored into the outlook, rising inflation across the world keeps risk to the downside. However, on the upside, the world has emerged from a series of traumatic years; countries and companies are, in many instances, stronger and more agile than they were in the past.

“South Africa’s citizens face continued increases in food, electricity, and fuel prices, against a backdrop of ongoing power supply issues. This will undoubtedly continue to weigh on South Africa’s economy which, while currently not tabling a recession, points to lacklustre low single-digit gross domestic product (GDP) growth,” the group said.

In its latest integrated report Pick n Pay said in 2022 over the medium term, it expected to trade in a difficult economic and social climate, with low levels of economic growth, high unemployment, rising household costs, and constrained consumer spending.

“The increased risk of social instability remains, including community protests against poor levels of government service delivery,” the group said.

Maphumulo said there was also a possibility of a global recession which could also affect South Africa.

“The first six months of the 2023 financial year won’t be great. It depends on whether inflation peaks then you will start to see those thoughts on reducing the repo rate, and employing expansionary policy; that’s when things will start to get better, probably in the second half of financial year 2023,” she said.

Maphumulo said some of the retailers were also affected on the the cost side, where some of them didn’t have backup generators for their stores, and had to now invest in this equipment, while the price of diesel was also high.

Meanwhile, Fitch Ratings in its recent report titled “Fitch Ratings EMEA Retail Outlook 2023“ said it foresees a deteriorating outlook for Europe, the Middle East, and Africa (EMEA) retail in 2023.

The firm said a challenging environment lies ahead for EMEA retail in 2023 as consumers face cost-of-living increases, focus on value and cut discretionary spending, while retailers battle cost inflation.

“This will put pressure on profitability and lead to higher leverage in 2023,” it said.

According to the firm, it expects non-food retailers’ revenue and profitability to be more affected than grocers’ in 2023.

“Within non-food, some sub-sectors, such as fashion, furniture, and electric appliances, are more exposed to demand contraction where we do not expect inflation to offset volume declines.

“We expect continued intense competition among grocers, as they target value-seeking consumers, and aim to protect market share and footfall amid high operational gearing,” the group said.

Fitch said it believed the ability to adjust the offer and manage price perception while managing cost inflation will be the key to retailers’ performance in 2023.

“For non-food retailers, it will be crucial to manage inventories to lower overall demand. We expect profitability pressure from rising labour costs and higher energy costs in 2023 as most companies had hedged for 2022 and therefore have not yet experienced the full impact of higher energy costs,” it said.

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