Rising unemployment and a bleak economic outlook means the listed retail sector, which, in 2019, experienced its worst year since 1998, could be in store for more of the same.
Analysts say the sector has no more room to absorb inflationary costs and will need to pass these onto consumers in 2020.
Retailers, especially those selling food, have kept price inflation low and have not expected consumers to foot the bill for rising electricity and fuel prices, but have reached the limit of their ability to cut operating costs.
Gryphon Asset Management analyst Casparus Treurnicht said, “Our retailers have been absorbing costs already over the past two years, in my opinion ... especially on the food side. It’s all about how much margin-squeeze is left.”
He said food retailers have no more space to absorb costs without increasing prices, which could mean fewer sales. “Any substantial increase in inflation without economic growth will result in a catastrophe for our food retailers as volume will be reduced further.”
2019 was a tough year for listed retail stocks, even those with offshore exposure, with the Truworths share price dropping 44.15%, Mr Price 25.86% and Woolworths 11.78%. Shoprite lost 33.78% and Massmart plummeted 50.43%. Pick n Pay was only 5.73% down and Spar decreased by 4.81%.
The general retailers index fell 21.88% in 2019, a greater drop than in 2008 (20.19%) at the height of the financial crisis.
The outlook for retail companies’ profits in 2020 is poor following a decade of “wealth destruction”, said Sasfin equity analyst Alec Abraham. “It’s been almost a decade of the destruction of consumer wealth. The impact has been devastating. We need to grow at more than 5% to 6% for multiple years, just to rebuild the wealth people had 10 years ago.”
Food retailers do better in tough times, but even food sales are down. In economics theory, said Abraham, the annual growth of general retailers such as Pick n Pay and Shoprite Checkers should be on par with increases in population — but it isn’t, showing that consumers have been buying less food and cheaper brand.
Treurnicht said job losses are fueling lower consumer spend. “In my opinion, we are seeing small declines in government employment which will shrink the consumer spending pool.”
Leaving and liquor
Emigration appears to be increasing, with the FNB estate agents survey showing 14.2% of all house sales in the third quarter of 2019 were due to owners emigrating, up from 7% in 2018. This means fewer high-end customers for retailers and increased retrenchments, as many who emigrate employed staff.
One area in which retailers expect to see growth, however, is in liquor sales. In 2020, liquor sales will remain “somewhat defensive”, said Treurnicht. Spar’s Tops liquor stores’ revenue growth was 17% according to its latest annual results, with Shoprite Checkers opening its 500th liquor store last year.
Some of the growth is due to the closure of mom-and-pop stores said analysts. Argon Asset Management equity analyst Bjorn Samuels said: “I would, however, mention that many retailers still see an opportunity to roll out more liquor stores, which would support sales growth.”
Clicks, however, had a decent 2019 with its share price up 34.02% and Dis-Chem up 4.19%.
In the year ahead, Treurnicht said: “Massmart will seriously need to have a relook at their model. Consumers will not be buying durable goods during trying times. I am still of the opinion that Woolwoorths revenue is at risk due to people trading down to Shoprite, Spar and Pick n Pay.”
Samuels said retail profits will be hard hit. “Many retailers have already begun cost-cutting initiatives such as head count reduction, negotiation of lower rents and store closures. However, in the near future a point will be reached where all inefficiencies have been removed and profits will decline because cost growth can no longer be contained.”
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