SA retailers show growth despite digital disruption

South Africa’s largest retailers saw stronger revenue and profit growth through the last quarter of 2017 and first quarter of 2018, despite lower retail sales growth during the first four months of this year.

This is according to an analysis of the retail sector published by EY on Tuesday.

It shows that the pharmaceutical, health and beauty segment out-performed the rest of the retail sector during their most recent reporting period, with grocers also faring well. Fashion retailers performed better than they did in 2017, while retailers in the general category turned in only marginally higher revenue and profits growth.  

The analysis further found that the sector’s overall revenue growth was comfortably ahead of inflation, at 7.1%, with profits up 7.5% during the same period.

Factors to note

Derek Engelbrecht, Africa consumer products and retail sector leader at EY, says that, although the results appear favourable, a few factors that need to be taken into account.

“In the sample of retailers included in the analysis, only a few would have reported results for the period ending March. Many of the results are in fact based on a December period end, and at that point, retail sales growth was considerably stronger. So we might still see in the next reporting cycle, that the very weak retail sales growth has yet to reflect in retailers’ numbers,” said Engelbrecht.

According to data released by StatisticsSA last week, year-on-year retail sales growth for the first four months of 2018 averaged 3.1%. This rate of growth was considerably below the pace of growth reported between September and December 2017, which averaged 5.5%.

According to EY, a breakdown by product category indicates that furniture and electronics sales are robust, growing at double digit territory. This was closely followed by pharmaceutical, health and beauty retailers.

Engelbrecht says the pharmaceutical, health and beauty sector has been outperforming other retail segments for a considerable period of time. This is due, in part, to newcomers in the market.

Until recently, there was one dominant player facing some competition from the grocery segment. However, there are now three relatively new national players in this space, of which two are in a strong growth phase, according to Engelbrecht.

“The increased competition has resulted in the strong growth numbers we see coming through in this segment,” he added. 

By revenue, grocers take the lion’s share of annual retail sales of R370bn. This is followed by general dealers, at R170bn, fashion retailers at R75bn and pharmaceutical and beauty retailers accounting for R50bn of sales. 

Grocers, however, make the most in annual profits at R10.8bn. The differential with the next highest profits contributor - namely fashion with R8.6bn annual profits - is considerably narrower than it is from a revenue perspective. General dealers, as well as pharmaceutical and beauty retailers make R4.6bn and R2bn in annual profits respectively.

“These figures indicate just how profitable the fashion segment of the retail sector is. Fashion retailers earn R1 in profits for every R8.40 in merchandise sales. Pharmaceutical and beauty retailers must sell R25 of product to earn R1 in profits, while grocers and general dealers need to sell R34 of goods to earn R1 in profits,” said Engelbrecht.

 “The strong performance in the fashion sector offers some insight into why the sector is being increasingly encroached on, both by new online entrants, and by more foreign entrants. This will continue to place pressure on local fashion companies, as their market is sought after.”

He expects other retailers will also face increased competition and that it is only a matter of time before the “international disrupters” move into Africa, as they focus on becoming truly global operators.

“This means that the retail sector will need to focus on it responds and drives the future of retail in South Africa,” cautions Engelbrecht.

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