South Africa’s retail sector, which has been struggling with low consumer spending and high inflation, could see some relief in the second half of 2024 as interest rates are expected to decline, according to analysts.
The country’s retailers, ranging from clothing and electronics to home improvement, have reported mixed results for the festive season, reflecting the impact of the pandemic and the port congestion that disrupted merchandise deliveries.
However, some of the biggest names in the industry, such as Woolworths, TFG, and Mr Price, saw an acceleration in sales growth in December, suggesting that consumer demand was not completely subdued.
Analysts say that lower interest rates, which the central bank is forecast to start cutting in May, could boost consumer spending by easing the debt burden of households and increasing their disposable income.
“Lower interest rates will help the consumer. It will also help the retailers in terms of their financing costs and working capital,” said Alec Abraham, senior equity analyst at Sasfin Wealth.
He added that lower food inflation, which has been driven by higher maize prices, could also benefit consumers and retailers, especially those that sell food products, such as Woolworths and Shoprite.
The South African Reserve Bank (SARB) has kept its benchmark repo rate unchanged at 6.5% since July 2023, after raising it by a cumulative 200 basis points since November 2021 to curb inflation and support the rand.
The SARB expects inflation to average 4.9% in 2024, within its target range of 3% to 6%, and projects economic growth of 2.2%, up from an estimated 1.5% in 2023.
Paul Steegers, the senior equity research analyst at Nedbank, said that while the retail sector was not facing a “bullish backdrop”, he saw “prospects of better growth” this year, especially in the second half.
He said that the more durable categories, such as furniture, appliances, and electronics, which have been lagging behind the more defensive ones, such as food, pharmacy, and apparel, could start to pick up as consumer confidence improves.
However, he cautioned that the retail sector still faced significant challenges, such as the slow vaccination rollout, the threat of new coronavirus variants, the high unemployment rate, and the uncertain political environment ahead of the local elections in May.
He also said that retailers had to contend with rising competition from online platforms, such as Takealot and Superbalist, which have gained market share during the pandemic.
“The online channel is a disruptor and a threat to the traditional brick-and-mortar retailers. They have to invest in their online capabilities and find ways to differentiate themselves and retain their loyal customers,” he said.
Stephan Erasmus, investment analyst at Anchor Capital, said that another risk for retailers was the ongoing supply chain disruptions, which could lead to higher costs and potential sales losses.
He said that retailers had to manage their inventory levels carefully and balance the trade-off between price and volume.
“Retailers have to be very agile and flexible in this environment. They have to adapt to changing consumer preferences and behaviours, and offer value and convenience to their customers,” he said.
Despite the challenges, Erasmus said that he was optimistic about the retail sector’s prospects, as he believed that the worst was over and that there was room for recovery.
He said that retailers that had strong brands, loyal customers, efficient operations, and innovative strategies would be able to survive and thrive in the post-pandemic era.
“There is always hope for the retail sector. It is a resilient and dynamic sector that has shown its ability to bounce back from difficult times. There are still opportunities for growth and value creation for both retailers and investors,” he said.
Source: Reuters
