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Building material retailers lose their sparkle

Retailers have been resilient during SA’s retail malaise but reality has come to bite sales.

Building material retailers have impressed with their resilience during tough times over the last two years compared with their hard-pressed apparel counterparts.

However, their strength and ability to buck SA’s retail malaise is increasingly being put to the test.

Consumer spending is in the doldrums, with rising living costs weighing on purse strings and consumers’ disposable income being eroded by a heap of debt.

In the minds of hard-pressed consumers, it’s becoming prudent to prioritise the spend on groceries over revamping homes. This is evident from the downbeat sales updates of major building materials retailers.

Italtile, which is a franchisor and seller of tiles, bathware, laminated flooring and other related home-finishing products through its CTM, Italtile Retail and Top T brands, is the latest retailer to feel the pinch.

“Market conditions have been worse than what we have experienced,” said Italtile CEO Jan Potgieter.

Although system-wide sales in the year to June 30, grew by 4% to R6.21 billion, sales volumes have faltered. Italtile pulled in like-on-like retail store turnover growth by 2.7% with average price inflation of 4.3%, which means that real sales volumes fell by 1.6%.

Building materials retail sales
Company Retail sales growth Like-for-like sales Inflation Period
Italtile 4% 2.70% 4.30% Year Ended 30 June 2017
Massmart’s Massbuild 0% 0% 4.70% 26 weeks to 25 June 2017
Cashbuild 10% -2% 2% Fourth quarter update
Source: Italtile, Massmart and Cashbuild

Home renovations and building account for about 70% of Italtile’s business.Consumer confidence has sunk to its worst level since 1982, according to the FNB/Bureau for Economic Research – with most consumers worried about their future financial wellbeing.The retailer faces multiple challenges, among them, declining spending by middle-income consumers on home upgrades due to jitters over their financial wellbeing. 

Arguably, this sector may not be the growth vector, if home building figures are anything to go by.  According to Stats SA, the number of building plans approved for new houses declined by 6.2% year-on-year between January to May 2017.

Damon Buss, equity analyst at Electus Fund Managers, said although consumer confidence has improved since the lows seen in 2015, it’s unlikely to improve materially given increasing political uncertainty.

“When a consumer is not confident, big ticket purchases get delayed.”

Making matters worse is that real wage growth in the private and public sectors has been faltering since early 2016, said Buss.

“Building a new house or renovating generally require a significant portion of a consumer’s disposable income and hence in an environment where their ability to spend is constrained, hardware retail sales will come under pressure.”

Italtile is also impacted by the strength of the rand against the US dollar. The strength of the local unit by 13.1% during Italtile’s reporting period has resulted in a glut of merchandise introduced by its competitors, who rely on imports.

Roughly 85% of Italtile’s merchandise is locally sourced.

“The currency has created a competitive environment, as our competitors moved stock through aggressive pricing and promotions. We are probably entering a price deflation period in some of our merchandise categories,” said Potgieter.

He believes that its local sourcing of merchandise will be a boon, as “there’s a bigger scenario of the rand weakening than strengthening”.

Alec Abraham, senior equity analyst at Sasfin Wealth, said the company’s results also indicate that upper-end consumers are also deferring home building decisions. Italtile is exposed to higher-end consumers through its brand Italtile Retail.

“Spending in the upmarket segment is under pressure. It shows that higher income groups have a negative sentiment on the state of the economy and country,” said Abraham.

Italtile’s rivals Cashbuild and Massmart’s Massbuild division (under its brands Builders Warehouse, Trade Depot, Superstore and Builders Express) are also feeling the pinch.

In a fourth quarter operational update, Cashbuild grew its revenue including P&L Hardware, a business it acquired in June 2016 for R350 million, by 10%. However, excluding the impact of new store openings and sales from P&L Hardware, revenue fell by 2%. When selling inflation of 2% is factored in, its revenue fell by 4%.

Massbuild’s sales fell by 4.7% (including product inflation) for the 26 weeks to June 25 2017.

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