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The South African appetite for shopping is showing signs of waning.

August 24, 2007 By Tom Robbins Cape Town – The South African appetite for shopping is showing signs of waning. According to Statistics South Africa, fewer furniture and appliance sales were recorded in June. The decline has been attributed to the introduction of far stricter lending criteria with the National Credit Act. But much of the falloff can also be traced to interest rates, which have been on a steady increase since last year. Stats SA said the lower furniture and appliance sales had dragged down overall year-on-year sales growth to 6.4 percent, from 9.2 percent in May. Consumers like Lisa Leemans, a single mother of two who works in a Cape Town bed & breakfast establishment, have begun to tighten their purse strings. Leemans says she has stopped buying clothes for herself and now has to borrow money to pay for her children’s clothing. All her income goes to basic living expenses. Leemans says that while she still shops on account at Edgars and Jet, she makes it a point never to owe more than R600. She once owed clothing stores as much as R5 000. “I promised myself that I will never get into that situation again,” she said at the Golden Acre shopping centre in Cape Town. But in spite of the double whammy of stricter credit legislation and rising interest rates, retailers and analysts do not expect sales to collapse. Analysts believe that while retail sales will not rise as they did in the past five years, growth is set to continue, albeit at a slower rate. Rob Forsyth, Investec Asset Management’s head of industrials, says that while furniture and appliance sales were hardest hit, clothing and food sales have remained robust. And although he expects sales in these sectors to start slowing, the chances of flat or negative overall retail growth are “highly unlikely”. Evan Walker, retail analyst at RMB Asset Management, agrees with this outlook. In fact, in contrast to the mature US retail market, local examples of flat or negative retail growth have historically been as rare as hen’s teeth, driven even in hard economic times by a growing population. In some areas, notably those ravaged by HIV/Aids, population growth has shown signs of slowing or even falling, resulting in subdued retail spending. But the recent influx of at least 2 million Zimbabweans – who have entered South Africa, mostly illegally, to escape their country’s economic meltdown – is expected to help boost retail growth. Forsyth says that while there is a historically high ratio of household debt to disposable income, household incomes are continuing to grow because of higher employment and above-inflation wage settlements. But consumers, especially those in lower market segments, have been hit by higher food prices – up 13.76 percent in the year to July – and a rising inflation outlook, as well as high petrol prices. Debt levels may be highest among middle-income consumers – particularly new members of the black middle class – who are buying big ticket items such as houses and cars for the first time. Carel van Aardt, a professor at the Unisa Bureau for Market Research, says that with the recent interest rate hike, members of the emerging black middle class might be forced to refocus budgets. Some customers of the up-market Woolworths chain are also beginning to feel the pinch, it seems. The retailer said yesterday that full-year profit growth before exceptional items and tax, at 17.7 percent, was lower than revenue growth of 23.1 percent, partly because of higher levels of bad consumer debt. But for Massmart, which owns the price-cutting Game and Makro chains, the party continues. The cash retailer said profit growth of as much as 27.8 percent was almost twice as fast as its sales revenue growth of 16.2 percent. Massmart said that while sales growth might slow in the short term, it believed consumer spending would remain bullish over time, as growth in the middle class would become entrenched in the economy. The new credit law may also help retailers, as it allows them to charge riskier clients higher interest rates. Forsyth says acceleration in credit sales is unlikely to happen before 2009. In the meantime, retailers are going to have to walk a tightrope between expanding their stores in the midst of a slowdown and simultaneously readying themselves for the expected acceleration.