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SA retail is in trouble

Retailers have been growing their own debt-levels and gearing’s been exploding, while ROE has been falling.

This article follows an exchange with Byron Lotter on Twitter (see here) after what I (and seemingly the market) believe was a very poor trading update from Woolworths (WHL).

But Woolies is not alone in this regard.

Here are the key listed retailers, their like-for-like same-store growth, inflation and the resulting indication of volumes at store-level:



So cyclical, discretionary non-food related like-for-like retailer volumes contracted by 7.3% over the latest reporting cyclical, across pretty much our entire listed retail sector.

That is not good.

But why is this happening? For a number of reasons, so let me list them for you briefly:

  1. Edgars: Edgars has been losing market share (in the unlisted space) that the other retailers have been picking up (in the listed space). This bleed appears to be over and Edcon is now ‘recapitalised’ and likely to chug along just fine protecting its market share. In other words, the listed retailers are no longer having their growth subsidised by Edgars’ woes.
  2. Shopping centres: Over the last decade shopping centres have been rolled out at an incredible pace across South Africa. Therefore, periods of soft like-for-like growth by the listed retailers have been obscured by store rollouts and space growth. Consider the fact that the domestic shopping centre boom is pretty much over (read this), and suddenly like-for-like is no longer being subsidised by store rollout.
  3. Credit market dynamics: Unsecured lending (inside and outside of the retail stores) is contracting. This is partially due to the National Credit Regulator’s latest stodgy affordability criteria (amongst other regulatory issues), but it is also due to unsecured lending out of African Bank, Capitec and the other banks contracting. These capital sources all borrowed from tomorrow to buy fancy shirts for today. Eventually, as consumer balance sheets, spending power and credit quality deteriorate, so will the volumes of new credit being pumped into the market. See here for NCR’s latest stats.
  4. Disposable income contracting: Inflation, low growth, limited to dropping employment and the rising administrative costs (‘administrative costs’ are a euphemism for various State taxes such as income tax, capital gains tax, VAT, electricity, water, municipal, eTolls, etc) have all led to a flat-lining in South African consumers’ disposable incomes (in real-terms, excluding inflation). When credit markets tighten, then this dropping in disposable income becomes twice as apparent. See here for some data on this. OK, to some degree, disposable incomes have been alright, but household debts have been bad and the bloated government payroll (a massive spender at shopping centres) has been capped. In other words, disposable income going forward is actually likely to be worse…

So, all in all, a combination of factors are converging to make this a very tough retail environment, yet there is an elephant in the room: retailers themselves have been growing their own debt-levels and gearing has been exploding, while their returns on equity (ROE) have been falling (see below:






So not only have retailers been using more and more debt to finance themselves, but they’ve been doing this at incrementally lower returns.

And then, on top of that we start to have falling volumes in even some defensive categories….?

The point is, South African retail is in trouble. This, in a way, is acknowledged by the fact that many of the retail groups are desperately acquiring businesses outside of South Africa. If South Africa was a good retail investment, why wouldn’t these groups deploy their capital in South Africa?

It is simple, we are not. Hence, they are not.

I’ll write a bit later on the full effects of this, but consider the following: retail REITs (i.e. listed collections of shopping centres) have a historical beta with the listed retailers that approaches 1.0x.

In other words, if local retailers struggle, rental escalation cannot be passed onto them, rental holidays appear, vacancies eventually materialise and highly-indebted shopping centres get impaired. And, within highly-geared REIT structures, when net asset value drops then loan-to-values are breached, distributions are the first thing to be cut, and… and… and…. I’m sure you get the picture.

This is a lot of doom and gloom, but consider this parting thought: have your shopping habits changed in the last year or two? Think about it….

This article was first published on here, and republished with permission.

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Disappointed in Byron for that poor form in the Twitter exchange. Keith, always the gentleman…

Fair point, E. I probably shouldn’t have referenced the twitter exchange. I was just trying to set the scene for the article, not use it as a platform to one-up Byron. Everyone’s entitled to their views, even if they conflict with your own. Apologies to Byron here for my faux pas, but it doesn’t detract from the point I am trying to make on the retail sector.

It does detract as it proves that “fund management” is an ego game of Rah Rah!
Bit silly really but at least you realise it.

SA property is in trouble, not just retail. Why do you think Liberty is listing it’s 2 Degrees (below zero)? 🙂

Whatever the true figures are i think the retailers as a whole ARE in trouble according to my observations when visiting the shops – especially the small independants. the shops during the week are deserted and shops open and close frequently

My simple answer: SA’s money are finished.
The only money still left are pension fund reserves?

Is this the reason that I am beginning to dig into my loyalty points /miles etc. to pay for “essentials”! 🙂

It is an interesting table at the top of the article but the reality is that comparisons cannot be draft between companies in retail.

The few large retailers out there play in very different demographic markets.

You could vaguely compare Pick ‘n Pay to Spar but even then, Pick ‘n Pay serve a far wider demographic and LSM range. Add to that that Pick ‘n Pay has 7 stores within a 5km radius of my house whereas Spar has 2 so you would be looking at scaled distribution networks as well.

You could possibly compare Truworths to Foshini, but then, again, you realise that you aren’t comparing stores but groups where TFG has stores like YDE and @Home, Totalsports etc. which are separate brands, and Truworths has Naartjie and Earthchild which muddy the LSMs and demographics again.

People are feeling the pinch so a brand like high-LSM Woolworths will be hurting on the food side. Not that there is anything wrong with Woolworths food, but it is just part of the cycle. Hopefully they don’t try to change things. Their clothing quality and pricing needs revising though.

Add to that, that Mr Price has problems with ranging at the moment, and Pick ‘n Pay has issues with brand image and consistency and you realise why Mr Consistency: Shoprite is outperforming as per usual.

Don’t be so negative about SA! Yes we have a culture of incompetence, greed, cronyism, entitlement, corruption, racism,self-enrichment, murder, disrespect for the law, taxi violence etc but at least we have 7000 species of Fynbos not to be found anywhere else in the world!
Now beat that!

Great article and well researched as usual Keith.

End of comments.



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