South Africa's largest retailers book 5% growth, finds EY

Things are back on the up for the South African economy in 2017, particularly in the retail sector, after a major slump in 2016. A new report from EY reveals that the largest retailers in South Africa recorded substantial increases in profit in the first half of the year, in tune with the broader Sub-Saharan Africa region.

South Africa’s (SA) retail market experienced a hard year in 2016, particularly during the second half, when profits for the sector fell by 2.9%. The impact was particularly felt amongst the Fashion, DIY and Home-ware sectors, which, due to their lack of strict necessity, tend to face the brunt of a drop in consumer purchasing power.

The drop was accompanied by poor performances across the economy, with major falls in both the manufacturing and the mining industries. Moreover, a drop in gold prices and slumps in other areas meant that the entire region of Sub-Saharan Africa (SSA) was facing similar challenges. While the entire region was affected, SA’s period of decline proved to be longer and more severe than the rest of SSA.

Now, Big Four professional services firm EY has provided analysis that shows a turnaround for the retail sector, both within SA and extending across SSA. EY’s Consumer Products & Retail leader for Africa Derek Engelbrecht said, “The second half of 2016, going into the first quarter of 2017, was a tough period for the economy as a whole. Retail was not spared, and negative sales growth was evident through the last quarter of 2016. Since then, sales have recovered, and although not yet positive in real terms (after inflation is taken into account), they have at least returned to positive territory in nominal terms, which is an encouraging sign.”

In the first half of this year, the retail sector in SA recorded growth in profits of 4.9%, which the report attributes to a number of possible positive factors. Firstly, the like-for-like sales segment saw much stronger growth, which boosted the industry as a whole. Moreover, a number of large retailers including Pick pay, Shoprite, Dis-Chem, Spar, Woolworths and Masmart, have all demonstrated eagerness to roll out new stores, further giving the market a push. Meanwhile, external factors, such as falling inflation in product value, strengthening of the Rand, and a recovery from drought with a consequent rise in food-production, have all contributed to the revival.

However, the turnaround is far from complete according to the report. Two issues continue to pose a threat to the sector, the first and most alarming being a fall in returns on equity (ROE) for retailers, while the second is a tight squeeze on margins. The latter can be attributed to the dreaded combination of a fall in consumer purchasing power and an increase in market competition with the entry of new players. Predictably, margins fell particularly hard in the luxury segments of the economy.

Meanwhile, on the falling ROEs. Engelbrecht said, “Whilst the sector is improving after a particularly tough 2016, there are still some metrics that remain concerning. Most notably, ROEs are still under pressure, and that is particularly the case for fashion retailers. This is to some extent due to the unique circumstances fashion houses face – including the well sited rising foreign competitor landscape, coupled with shifting customer behaviours and falling sales volumes. On the other hand, specialty retailers continue to drive higher ROEs, and we attribute this to their niche market and ability to quickly respond to shifting customer expectations,”

Moreover, the firm also warns of the remaining risks in the sector, as local retailers look to expand, both domestically and internationally, with a particular emphasis on credit. However, as per Engelbrecht, riding the economic turnaround while remaining true to principles of customer-centricity and evolving with customer needs should be a solid recipe for survival in the economy.

Foreign investment might also be key to recovery for SA. According to McKinsey Global Institute, strategic foreign investment could boost the GDP of the country by as much as 19%.