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Retailers needed to take advantage of the consumer trend of buying down to soften the blow of the tough economy, Deloitte South Africa’s consumer business leader, Rodger George, said yesterday.

July 23, 2008

By Tom Robbins

Cape Town – Retailers needed to take advantage of the consumer trend of buying down to soften the blow of the tough economy, Deloitte South Africa’s consumer business leader, Rodger George, said yesterday.

George said bringing more affordable products into the mix, particularly on monthly groceries, gave retailers a chance to gain market share.

Consumers were showing signs of recession-like behaviour, which meant a readiness to give up the frills on items consumed in the home.

But George said consumers were less willing to compromise on more durable products, such as clothes and electronics, which usually carried more status.

Shoprite deliberately cut its gross profit margin for the six months to December to grow market share. Due to a combination of sales growth of 21.7 percent and contained overhead expense growth, it was able to increase trading margins from 3.8 percent to 4.4 percent.

Both Shoprite and Pick n Pay have been discounting basic items such as bread and potatoes in a battle to attract consumers, suffering from high inflation and interest rates.

Woolworths said its “heartland” of middle- and upper-income customers was “feeling the pinch”. As a result, it had reduced entry-level prices.

Nothando Ndebele, a portfolio manager at Renaissance Specialist Fund Managers, said that in a downturn, retailers were limited in their ability to grow sales substantially. There was more room to move to contain costs, such as holding back store expansion plans and reducing employee costs, Ndebele said. But even here, there were constraints. Frequently, expansion costs had already been committed to.

Ndebele said it was dangerous to cut gross profit margins, as this put pressure on trading margins, especially if volumes failed to respond sufficiently.

Softer sales at middle- and bottom-end retailers could be partially offset by top-end consumers buying down.

But up-market retailers had no falling consumers to catch and if they went down-market they would erode brand value, which could be detrimental when the economy turned.

George said stock holding levels needed to be reduced. Manufacturers that made to order would benefit and retailers could squeeze lower prices out of them.

Another problem might be that stock efficiency systems were another expense and took time to implement, but George said the expense was justified. Benefits would flow through into an upturn.

What was not in doubt was that if a retailer had the cash, or could stomach the debt, there were bargains out there.