Autopsy of retail trading updates

With many retailers having issued trading updates recently, we have collated our observations and thoughts regarding what these statements mean for the 2024 outlook for retail.

Sales volumes

The first theme distilled from the retailers’ trading updates was a general decline in sales volumes, that is; shoppers bought fewer items. While it may be reasonable to expect this for discretionary retail categories during a prolonged and deep economic downturn, such as that currently being experienced in South Africa; it was a surprise to see negative volumes from food and grocery juggernaut, Shoprite. People buying fewer food and groceries? Yikes!; This, in my mind, points to the extreme pressure on consumer spending.

What’s more, all the updates recorded even slower sales momentum in the final weeks of the reported trading periods.

Selling price inflation

The second major component of retail revenue growth is price inflation: Here too, we observe that the basket selling price increases that boosted especially grocery retailers’ revenue numbers since 2022, have begun to dissipate as input costs have receded somewhat in recent months.

So, with both lower volumes and lower price increases, I believe the retailers are in for a tough 2024 in terms of growing their top lines.

Discounting...or lack thereof

The final theme is that the fashion retailers all stated that they increased the participation of full-price sales; and general reports of a fairly muted Black Friday. This supports our anecdotal observation around the time of Black Friday: That is, in 2023 we observed that retailers were far more measured and targeted in the range of merchandise and pricing that they put on offer for their Black Friday specials; shoppers picked up on that and responded in an equally measured and targeted approach to their purchases.

It is our opinion that this measured approach by retailers to discounting signals retailers’ belief the consumer market to be so weak that discounting product will not be rewarded by a sufficiently large uptick in volumes, to drive total revenue growth. So instead, the retailers have sought to protect their margins by selling as much as they can at full price, to support bottom-line earnings for the coming consumer spending ‘drought’ amid political uncertainty, the high cost of living and the uncertainty of the timing, pace and quantum of probable interest rate declines.

Regarding port congestion, we suspect that the impact may well be less severe than expected as retailers will likely look to manage (read ‘reduce’) their stock holding in the face of weak consumer demand and higher holding costs as a result of the elevated interest rates.

In conclusion, from an investment point of view, in the absence of volume growth we find it difficult to be positive on the retail sector. Sustainable volume growth, in turn, appears unlikely in the context of the country’s muted medium-term economic outlook and so, any meaningful increase in consumer wealth. Having said that, we cannot ignore the potential short-term rally that may ensue from the cumulative effects of a further reduction in inflation and interest rates cuts – possibly only in the second half of 2024. And in that scenario, we favour discretionary retailers, which are trading at lower valuations than the more defensive, non-discretionary retailers and are more geared to any consumer upside.