In a research note that paints a dire picture of the long-term prospects of SA’s economy, research outfit Salmour Research suggests that investors might consider putting their money in food retail stocks aimed at the budget consumer and think twice about discretionary retailers and property stocks.
Analysts Chris Gilmour and Rod Salmon conduct research for institutional investment funds and in a new research note try to work out good long-term investments while warning that SA faces sluggish economic growth amid rising consumer debt, unemployment and a lack of policy and fiscal reform.
They use data to warn of a weakening tax base and increased emigration, and they join the Institute for Security Studies in predicting further social unrest related to rising food prices and unemployment.
They warn that the recent commodities boom, which led to rising mineral prices and unexpected tax flows into SA, will not last as China’s property market, a main driver of the Asian economy, slows down. Already the price of iron ore, a component in steel used in construction, has dropped.
They note: “The main factor behind the tax windfall was the surge in platinum group metals (PGMs), particularly rhodium and palladium. But the collapse in the rhodium price has been almost as quick as its rise.”
What does weak long-term growth in SA mean for stocks? The research group predicts rising food costs and pressure on food producers that usually absorb costs when food costs rise and thus have lower profit margins. Food producers in SA include Astral, Libstar and Tiger Brands.
Salmour Research says food retailers should benefit because they are usually in a more powerful position and are usually more able to pass on some costs, but not all costs, to consumers. “Investors should lean towards non-discretionary spending sectors, such as food retailing.”
The pair like Shoprite, a leader in discount retail, which has budget stores of the same name as well as the Usave brand. Shoprite has just bought Massmart-owned Cambridge and Rhino Foods discount grocery stores to expand its low-end footprint.
Many firms are investing in cheaper brands, suggesting, like Salmour Research, that they too see a poor long-term prognosis and weaker consumers.
Mr Price, an affordable clothing store that sells mostly for cash, bought even cheaper retailer Power Fashion in 2020. TFG, owner of Markham and Sportscene, bought Jet in 2020. Pick n Pay has said its main growth focus until 2025 will be in the lower end of the market, with plans to expand its discount Boxer chain.
Sportmans Warehouse has planned new smaller sports stores in more peri urban areas, with TFG saying it is also looking to open Jet stores in areas where it will benefit from the informal economy.
Salmour does not encourage long-term investment in discretionary retail such as high-end clothing retailers, noting there is growing pressure on the sector in general to invest more in online sales, but this is costly and loss-making in many instances.
Clicks CEO Vikesh Ramsunder has pointed out how expensive delivery services are for retailers, saying it is not actively pursuing growth in its courier pharmacy delivery service because Clicks makes less money delivering medicines than it does in-store. “Deliveries are margin diluted and we will not chase market share at any cost,” he said.
Pick n Pay CEO Pieter Boone last week told Business Day that its on-demand grocery service, which delivers groceries within hours, is growing exponentially but is not yet profitable.
Salmour predicts that online retail, while offering a lower return, will reduce demand for space in malls as wealthier and tech-savvy customers choose to shop from home. Malls already face requests for reduced rent. Companies including TFG, Truworths, Woolworths and Game have all reported negotiating lower rents in the past year.
Salmour suggests developers and investors in retail centres will need to reduce their expected rental return on shopping centres. “More than a third of American malls are forecast to close. and the UK may be “over-spaced” by about 40%. SA is unlikely to miss this global retail downsizing trend.”
They also suggest that most property stocks — especially those exposed to malls and office estate — are best avoided. The work-from-home trend that started during Covid-19 means residential property markets allow people to work from places further away from the crowded and high-cost city locations.
What they say is confirmed by the SA Property Owners Association (Sapoa) reporting last week that SA’s office vacancy rate was at its highest yet in September, with just over 15% of office space vacant.
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