Consumers appear to be in better shape, with good demand for fast food, furniture and electrical appliances. But increases in fuel and electricity prices, continuing high unemployment and possible rate hikes may spoil their appetite.
The results of direct response retailer Verimark, furniture and appliance retailer Lewis, and restaurant group Famous Brands yesterday indicated that consumers’ finances are improving.
Johan Enslin, the chief executive of Lewis Group, said its good performance was due in part to the improved economic health of consumers in its target market of living standards measurement (LSM) groups 4 to 7. This resulted in improved sales and better credit collections.
The Lewis group debtors book showed an improvement in the percentage of customers in the “satisfactory paid” category to 74.5 percent from 72.7 percent last year. The number of customers classified in the slow-paying and non-performing categories declined.
Enslin said the encouraging signs of a sustainable improvement in spending and growing demand for credit were supported by higher wage increases in the public sector and stabilising unemployment.
But he was cautious about the pace of economic recovery as job creation was key to sustained growth and consumers were experiencing hikes in fuel and electricity prices.
Abri du Plessis, the chief investment officer at Gryphon Asset Management, said consumers were in a better position and it was a good sign that there was growth over a broader front, especially in durables.
Statistics SA reported that retail sales in March rose 5.1 percent year on year from 5.5 percent the month before. The growth in March was primarily due to gains in the household furniture, appliances and equipment category.
Chris Gilmour, an analyst at Absa Investments, said consumer spending was holding up, but this recovery was different to previous upswings due to the National Credit Act and high levels of consumer debt.
As a result, people were looking for value in niche areas, which they were finding at Verimark, Lewis, JD Group and Famous Brands. Gilmour said Famous Brands had the greatest prospects. The company intended to double the size of its business by 2013 by taking its pub brands into townships.
Although the World Cup was a significant factor in the results, Gilmour said there was “undoubtedly strong consumer demand underpinning them”.
Paul Bosman, an equity analyst at PSG Asset Management, said Famous Brands offered a combination of price, location and product quality that was hard to match.
Syd Vianello, an analyst at Nedbank Capital, said in the case of Lewis, the key factor was that collections were good, which was a clear sign that consumers were doing better. This mirrored JD Group, which reported good results last week.
Vianello said the biggest risk to consumer spending was price rises, particularly food inflation, which would reduce the amount consumers had available for other purchases.
Another challenge was an interest rate hike, which would be felt by retailers from about July next year. Enslin said interest rates did not affect Lewis customers as less than 5 percent owned homes or cars.
Vianello said the biggest single issue for Lewis was that its clients kept their jobs. But it was a fallacy that they would not be affected by interest rate hikes. Even if customers were not directly affected, the companies they worked for might be. This could mean no wage increases or even job losses.
Most retailers and some food producers are expanding space or capacity to meet increased demand.
Famous Brands plans to open 176 outlets this year after opening 111 in the year to February. Bosman said there was still room for growth as the business was opening outlets in new market categories where it did not historically compete. The new brands it had acquired would enable it to roll out more stores without cannibalising its existing business.
Verimark chief executive Mike van Straaten said the propensity of consumers to spend had undoubtedly improved, but it would be unrealistic to expect Verimark’s very strong growth in sales over the past two years to be maintained. Still, sales would be supported by expanding trading space.
André Hanekom, the chief executive of Pioneer Foods, which also reported results yesterday, said: “I still believe there will be growth in consumer spending.” In response Pioneer would spend R1 billion on new capacity this year after spending R1bn in the past year, including on a new biscuit plant and juice factory. – Business Report