The business confidence levels of retailers declined notably during the second quarter of 2011, according to results from the latest Ernst & Young / Bureau for Economic Research (BER) retail surve.
The percentage of retailers reporting that they are satisfied with prevailing business conditions slumped from 58 to 47 during 2011Q2, after peaking at a three-year high of 63 during 2010Q4.
According to Derek Engelbrecht, retail & consumer products sector leader at Ernst & Young, this contraction can largely be ascribed to a marked slowdown in sales growth and substantial increases in retailers’ purchasing prices.
Given the softening in consumer demand, most retailers were unable to increase their selling prices in line with the increases in their input costs, implying downward pressure on profit margins,” says Engelbrecht.
On a breakdown of the survey results per retail sub-category, it is clear that durable goods (particularly hardware, paint and glass) and non-durable goods (such as food, beverages, tobacco, cosmetics and pharmaceuticals) retailers saw the largest slowdown in volume growth. In the case of durable goods, lower growth rates can most likely be ascribed to base effects and the replacement cycle nearing its end, as consumer spending on durable goods such as furniture, electronics and other household appliances rebounded strongly during 2010.
Slower growth in real wages, lacklustre increases in household credit extension and expectations that interest rates may start to edge upwards during the second half of 2011 may also be spoiling the party for durable goods retailers.
“In turn, the anaemic pace of job creation, coupled with rising food and fuel prices, probably weighed on non-durable goods sales volumes during 2011Q2,” Engelbrecht says.
In sharp contrast, retailers in semi-durable goods (like textiles, clothing and footwear) reported that sales growth rebounded following an unexpected slump during Q1. While semi-durable goods retailers also reported substantial increases in their purchasing prices relative to the second quarter of 2010, they were able to contain the increases in their selling prices, and in doing so, boosted volume growth.
Another striking feature of the latest retail survey results is the rate at which the input costs of retailers are rising. Whereas a net majority of 3% of the BER’s retail respondents still reported slower increases in their purchasing prices during 2010Q4, 29% reported higher purchasing price increases during 2011Q1. During Q2, this index surged to a net balance of 54 points.
“While the price increases were broad based, retailers in the non-durable goods trade in particular reported a substantial uptick in purchasing prices, hinting that food prices may rebound more strongly than expected,” according to Engelbrecht.
The survey results showed that selling prices also increased further during 2011Q2, albeit at a slower rate compared to procurement costs. Given the confluence of higher commodity prices, soaring electricity and petrol prices and rising wages, it is not surprising that retailers reported further upward pressure on retail selling prices during Q2.
According to Statistics South Africa, the growth in retail sales volumes eased from a robust 7,6% year-on-year during Q4 to 5,6% year-on-year in Q1. The results from the latest Ernst & Young/BER retail survey suggest that growth slowed further during Q2.
During 2010, factors such as exceptionally high real wage increases, low interest rates, a strong rand (and hence low import prices), pent-up demand and high consumer confidence saw a better than expected bounce back in retail sales volumes.
“Given that we expect to see lower real wage increases, increasing food and fuel prices and interest rate hikes during the second half of 2011, as well as base effects, the growth in retail sales volumes will in all likelihood taper off further towards the end of the year. However, if retailers are able to increase their selling prices without further impeding volume growth, turnover could remain relatively sturdy,” says Engelbrecht.