By all accounts, last year was not unkind to retailers. Big names like Woolworths and MassMart recorded double-digit growth, while the economy as a whole expanded at a respectable 3.1%. But analysts warn that this year there are greater hurdles to overcome.
Iraj Abedian“I am more than willing to put my neck on the block and say that for the next four quarters, global economic conditions are not going to be favourable,” Econometrix economist Dr Iraj Abedian was quoted as saying at the launch of Manufacturing Circle’s first-quarter 2012 Manufacturing Survey in Moneyweb. Citing trouble in the Eurozone banking sector, shrinking Chinese GDP growth and a possible weakening in short-term US economic performance, Abedian said the outlook was stable, but that downside risks were manifold. “There are signs that suggest that despite their current stability, there are factors bubbling underneath the surface that could lead to a negative sentiment.”

The big picture

John King“The recovery of the global economy will probably be patchy and slow,” concedes John King, a consultant at Asset Protection International. “The US appears to be already recovering, but – as is the case in most of the major developed world economies – the recovery process is retarded by the headwind of having to simultaneously reduce debt at government, local government and consumer levels. This leads to slow and anaemic growth. To make matters worse, this debt reduction is taking place against a poor economic backdrop, leaving limited room for manoeuvre.”
He continues: “The Eurozone crisis has been aggravated by a tardy and fragmented political response, causing a loss of investor confidence, with Spain being the latest casualty. Most outside commentators advocate that the Eurozone adopt a clear policy for greater fiscal integration and expand the role of the European Central Bank. This has met with resistance at the political level as it increases the burden on the stronger economies in the zone to support the weaker ones.”
The malaise on the continent has now spread to China. “Unfortunately, the situation in Europe has had a negative impact on China as well, and their domestic economy seems to be experiencing some pressure at the moment,” comments KPMG senior economist Lullu Krugel. “Hence the Chinese central bank decided to cut interest rates in June. It is almost certain that Europe will now go into a recession. The way in which the situation is handled, however, will determine how long this will last, how deep it will be and how severe the impact on the rest of the world, including the US, will be.”

Implications for the SA economy

Locally, conditions are far from ideal. This is in part because of external weakness in the global economy. “There is a perception in the markets that South Africa’s prospects are most closely tied to those of Europe, which is our largest trading partner,” says King. “We have already seen this have an impact on the external value of the rand, which has fallen some 20% against the dollar over the past 12 months. The implications are that in rand terms, imports have become more expensive and our exports more competitive.”
Cees BruggemansFor retailers, this is a challenging trading environment. Depressed growth, inflationary pressure and falling household incomes do not promote consumer spending. Consumers have less disposable income due to price hikes in electricity, fuel and food. According to recent Andrew Levy surveys, average nominal wage increases have waned to 7.2% compared to a year ago, while inflation has increased 1–2%.
“Real household income has eroded from two sides, likely resulting in less household consumption strength as 2012 progresses, despite a modestly higher uptake of credit and job gains,” says Cees Bruggemans, chief economist at FNB. He points to the slowdown in the building industry and real estate as examples of this poor sentiment. “The building trades have been at recessionary activity levels for some time, in part reflecting the fallout from the property market decline following the 2009 recession and the changed credit culture at banks, making access to mortgage credit more costly and less easy to obtain.”
With consumer spending and economic activity muted, most analysts agree that interest rates, currently at their lowest levels in three decades, are unlikely to increase in the near future, with some even predicting a rate cut later this year. Says Ettienne le Roux, chief economist at RMB, “Although domestic interest rates are at record low levels, by comparison to other developed countries, they are still high. This means that should the wheels of the global economy come off, the Reserve Bank has the scope to further ease monetary policy.
Le Roux believes the only way to inject life into the manufacturing sector is for the government to deliver on its planned multibillion infrastructure spending: “The government’s sharpened focus on infrastructure development holds the promise of directly and indirectly boosting the economy – directly through higher levels of fixed investment and job creation, and indirectly through reducing the cost of doing business.”
While the depreciation in the currency will make our products more competitive, the demand from Europe and other trading partners is likely to remain feeble. “Fortunately, the rand will probably help a bit in the short term, but I’m afraid that there isn’t much that manufacturers can do,” asserts Dawie Roodt of the Efficient Group. “Productivity increases and a tough line in wage negotiations are probably the only variables under the control of business.”

Is there a silver lining?

But it’s not all doom and gloom. According to KPMG’s 2012 Global Manufacturing Outlook: Fostering Growth through Innovation, 76% of respondents globally are optimistic about their business outlook over the next 12 to 24 months. These businesses expect both sales and profitability will be up during the period, with nearly half of respondents placing both top-line and bottom-line growth as main priorities.
“Manufacturers are not just preparing for growth, but for high-margin growth,” says Jeff Dobbs, KPMG’s global head of diversified industrials. The survey highlights price volatility on cost inputs, risk in the supply chain and uncertain demand as ongoing challenges for manufacturers. “Manufacturers have acclimatised to a world where volatility is the norm,” explains Dobbs. “Today manufacturers are leaner and more agile, many with strong balance sheets and healthy cash reserves – in a nutshell, they’re poised for growth.”
It would appear that now is a good time to concentrate on your core business, performing process improvements and eliminating unprofitable product lines. “Some good advice for manufacturers and retailers in the near term is for management to stay close to the customer,” recommends King. “Critically review the business’s product offering and carefully analyse and build on competitive strengths. Many businesses can often out-do their rivals at low cost by offering personalised service.”
While times are indeed tough, this doesn’t mean that consumers aren’t spending. “The long duration of these subdued economic conditions has meant that inventories have run down,” comments King. “But some purchase decisions cannot be postponed indefinitely. Forced to act, there is a tendency for customers to prioritise purchases with a bias towards essentials, to ‘buy down’ and to skimp on discretionary expenditure like travel.”
He adds: “Paradoxically, though, there is pleasure in spending and while the overseas trip might be postponed, wouldn’t it be nice to get a new large-screen TV to watch Wimbledon? For the same reason, one might also expect stability or even increased demand for certain low-unit-price luxuries.”
Expansion and innovation
Lullu KrugelAccording to another report, Deloitte’s Global Powers of Retailing 2012, many retailers are looking to grow their businesses in promising emerging markets, including those in Latin America, Asia and sub-Saharan Africa. Comments Krugel, “Over the longer team, it might be worthwhile for retailers and manufacturers to consider alternative markets in the rest of Africa and reduce our dependence on trade with Europe.”
Another worldwide trend is innovation. “Retailers will not only be looking for growth in emerging markets,” the Deloitte report asserts. “They will also look to innovate in multi-channel strategies, mobile and data analytics to maintain or grow their market shares in developing markets. For example, one may open an online store overseas to test the market before committing to a physical presence.”
In its quarterly risk review, the international credit insurer Coface lists four trends in the SA food retail market. Comments lead analyst Saijil Singh, “Firstly, South African consumers are becoming increasingly health conscious. There is also increased demand for house or private-brand labels. Secondly, there is increasing demand for longer opening store hours or even 24-hour shopping. Thirdly, environmental awareness, waste reduction and organic farming are becoming important issues for local consumers.”
Saijil SinghHe adds that for township shoppers, price is not the only consideration: “Spazas and other informal shops tend to only supply leading brand items because their customers demonstrate strong brand loyalty.” Added to this trend is the fact that the black population’s buying power is increasing.
“Supermarket retail chains continue to convert or revamp their less successful store brands to a more targeted consumer base to boost sales,” says Singh. “There is also a trend for supermarket chains to buy back their franchised outlets to improve on customer service.”

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Synergy-Economic Outlook 2012