All retailers require electricity to operate their businesses, mostly for lighting but also for payment systems. As food retailers also need to power refrigeration units or face stock losses during load-shedding, they have had backup power for some time.
However, this comes at a price. Shoprite revealed last year that it was spending R100m a month on diesel to keep powering its stores countrywide.
As shown on the chart, 2022 was the worst year yet regarding load-shedding, with retailers particularly facing store shutdowns if they lacked backup power.
Until SA entered the realm of stage 4 load-shedding apparel retailers could cope. However, as stage 4 payment systems and lighting are down for six hours in 24, while stage 6 sees 18 hours of outages over a two-day period, stores are often forced to close while the power is off.
The likes of TFG and Mr Price Group are reporting a slowdown in sales due to lost trading hours. This was especially noticeable in September 2022, when SA experienced stage 6 load-shedding.
In its interim period to October, Mr Price Group saw 56% of trading days interrupted by load-shedding. The group estimates that more than 80,000 trading hours were lost due to power cuts. TFG reported 132,000 lost trading hours during its half year to September 30, up 160% compared with the previous period. We can only imagine what the number will look like for January.
At the time of writing we were in stage 5 load-shedding “until further notice”. There is talk of stages 7 and 8 being reached in the near future that could lead to the loss of additional trading hours for apparel retailers unless they have backup power. On stage 7 we are without power for 10 hours a day, and on stage 8 power is shed for 12 hours a day.
Backup power
For the apparel retailers, this will prove dire. However, as Mr Price reported that it would cover at least 70% of its stores with backup power by end-March, the lost trading hours would not be as severe as last year’s. TFG is putting initiatives in place, including backup battery power and mobile point of sale devices, that will protect about 68% of its SA turnover.
With apparel retailers sitting on higher-than-normal inventories, which were strategically bought before the festive season to ensure availability given supply chain disruptions, investors were concerned about January markdowns, especially in a deteriorating consumer environment.
On Friday, Mr Price stated in its trading update for the last quarter of 2022 that load-shedding negatively affected its sales, resulting in overall sales increasing 2.2% in the apparel segment excluding acquisitions. This resulted in higher markdowns given high inventory levels going into the festive season.
It seems the Mr Price stores that have backup power — mainly its recently acquired stores, Power Fashion, Yuppi Chef and Studio 88 — did experience double-digit sales growth, but those that do not have backup power have underperformed. While one would expect that was not all due to load-shedding, it is clearly having an impact.
But there are some upbeat signs. The November retail sales data reported last week saw positive trading in apparel, with textile, clothing, footwear & leather goods increasing 5.9% year on year in real terms, and household furniture, appliances & equipment up 6%, underpinned by Black Friday.
Woolworths’ trading update on Thursday showed positive trading in the fashion, beauty & home division, with sales growth of 12% over the last six weeks to Christmas day, up from the 10.8% reported for the 20 weeks to November 13.
This coincides with reports from listed retail property players, which said footfall has not slipped due to load-shedding as people have apparently diverted their spending elsewhere while shops were closed.
Food inflation
While food retailers will not have a problem keeping their refrigerators, lights and point of sale systems on, the second-round effects will be felt through their stock. However, agricultural businesses are feeling the brunt of load-shedding as, for example, dairy farmers cannot milk cows as they require cold storage facilities, which need electricity. Irrigation farmers also cannot irrigate their grains, maize, sugar cane and other crops, and chickens cannot be slaughtered, creating an artificial shortage.
The effect of this will be higher food inflation, with implications for Reserve Bank monetary policy as well as GDP growth for 2023. Food retailers would normally benefit in periods of high food inflation through stock profits, but this time could be different as there is no stock to buy in advance.
Load-shedding not only leads to added costs for retailers but also affects top-line performance due to lost trading hours. Given the fixed cost nature of retail, this leads to lower profitability. However, navigating tough environments is not new to SA retail management and they have come out tops in previous cycles. It does remain to be seen whether this will be a normal cycle.
• Ndebele is an investment analyst at Matrix Fund Managers.
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