Retail sector on tenterhooks as consumers ponder future
March 27, 2009
By Tom Robbins
The gathering downturn is making analysts increasingly wary that the strong recovery in furniture and clothing sales expected by the stock market may not come this year, despite tumbling borrowing costs.
From as early as mid-2008 the share prices of Foschini, Truworths, Lewis and JD Group started climbing on an outlook of lower interest rates.
All have held on to those gains, despite growing gloom in the real economy.
After digesting Tuesday's one percentage point cut in the repo rate analysts noted that consumer spending on discretionary retail goods was being pulled in opposite directions.
Rising retrenchments and a propensity by overindebted consumers to pay down debts will depress spending. But lower interest rates and consumer expectations of further cuts will encourage a recovery.
Jeanine van Zyl, a retail analyst at Old Mutual Investment Group South Africa, expected discretionary sales this year to be "roughly" in line with the low base of 2008.
The first half would remain tough but a better second half, as consumers responded to lower rates, should make for a slightly positive full year, she said. But while Van Zyl expected little meaningful change from last year, she foresaw a change in purchasing patterns across income groups.
The lower end, resilient until now, would be a bit weaker despite a slight increase in welfare grants, as most retrenchments were taking place in the blue-collar market.
The more indebted middle and upper ends had the most to gain from lower interest rates and there had not been significant job losses in these markets.
Van Zyl argued that Statistics SA's employment survey for the last quarter of 2008 did not reflect the current reality of job losses among lower-income earners. While the survey showed jobs were still being added, more recent changes were not captured, she said.
Mark Ansley, a portfolio manager at Cadiz, said the proliferation of credit granted to first-time borrowers since 2003 had caused considerable pain for many. He expected these consumers to use the respite granted by lower debt servicing costs to pay back debts rather than accelerate spending.
This, combined with a radical slowing in the economy, would keep consumers under pressure in 2009 but the share prices had held up, failing to reflect this view.
"The share prices are not factoring in the consumer downturn," Ansley said.
A third retail analyst agreed that spending should rise. The extent would depend on how first-time borrowers responded to lower rates. The analyst questioned the view that widespread job cuts had affected only miners and factory workers, arguing that retrenchments of mid-income earners at smaller firms were not widely reported.
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