Consumers turn retail tables
February 22, 2008
By Tom Robbins
Cape Town - The contrasting half-year performances of retailers Shoprite and Woolworths confirm a trend in the economy that upper-end consumers have cut back on spending the most, while those below them are still spending for now.
And this trend is translating into profit rises, and indeed profit falls.
Shoprite grew net profit by 48.2 percent to R675 million, while Woolworths fell 17.5 percent to R465 million,including a once off charge of R26 million.
Shoprite's core Shoprite chain, which caters for a middle and lower market, grew sales 27.3 percent, while its small bottom-end Usave business surged at 44.1 percent.
While the Shoprite chain's sales growth was partly dented by a strike in the previous period, this middle- to lower-income format is probably targeting the sweetest spot in the economy right now, benefiting from rising employment.
Shoprite's up-market supermarket chain, Checkers, managed a far more modest 13.4 percent sales growth, a figure that Gryphon Asset Management chief investment officer Abri du Plessis believed was roughly par for supermarket rivals, including Pick n Pay and Spar.
But Woolworths up-market food business hit its first wobbly in its short but spectacular history. Higher interest rates among its customers, who have taken on too much debt, cut real growth at stores open more than a year to a decline of 2.4 percent. But nominal sales, that include inflation, as well as new stores rose 18.8 percent.
Food retailing is a defensive sector but selling luxury foods is more cyclical, with characteristics of furniture and clothing retailing.
But not all credit retailers of discretionary items have suffered. Again it has been those segments targeted at the bottom end that have held up for now, such as Lewis and Shoprite's OK Furniture, while the Shoprite's upper-end furniture chain House and Home has suffered.
Then there is fashion retailer Truworths, which is in one of the most difficult spots in the consumer economy, being a cyclical credit retailer of non-essential fashion aimed at the middle to upper end. Truworths bucked the trend and grew earnings a share 18 percent, showing why a top management team should be paid well.
But if formal job creation stalls, as it could due to the power crisis, Shoprite could be hit too.The group said while it was not immune to the downturn, but that basic food sales were the last to be affected.
Shoprite shares yesterday gained 2 percent to R38.30. The food and drug retailers sector added 0.35 percent.
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