Before the financial crisis reared its head late last year, South Africa’s retail industry was already suffering under a cloud of high interest rates and soaring food and petrol costs, which were forcing consumers to tighten their purse strings.

These issues look to be abating somewhat now, with the Reserve Bank cutting interest rates, petrol costs having fallen dramatically from last year’s peaks, and food prices expected to come down later this year.

In the West things couldn’t be more different, as the retail hungry hordes that used the credit boom of recent years to fund their shopping habits are only now cutting back, in a dramatic fashion.

Both the US and the UK have seen a growing number of well known retailers being forced off the high street and into the history books, with the credit crisis having already claimed the scalps of British retailers Woolworths, MFI and Adams, and American electronics retailer Circuit City Stores.

In South Africa the climate appears much less severe, with no major bankruptcies to speak of, and while retail sales have been falling, the retailers seem to be coping far better with the decline in sales.

Like South Africa’s banking institutions, it seems the country’s retail industry is also avoiding the worst excesses currently facing their counterparts in the West – but will this continue or can we expect to see a string of vacant spaces in South Africa’s malls?

Why SA already has the brakes on

Retail sales in South Africa were already slowing sharply before the financial crisis emerged. And sales, as measured at constant prices, have now been virtually in decline every month since December 2007.

A combination of the National Credit Act (NCA), which made obtaining credit even harder for South Africans, coupled with high inflation and interest rates, served to put the brakes on consumer spending as far back as 2007.

“I believe those things were already putting a dampener on retail sales growth. So when the credit crunch hit the northern hemisphere, we were buffered to some extent because we’d already had some,” says Dennis Cope, finance director at Pick n Pay.

It is only now that consumers in the US and Europe are seeing lines of credit begin to dry up, however that is happening after millions have already overstretched themselves.

In South Africa, whether through foresight or good fortune, the tightening of credit through the implementation of the NCA in June 2007, helped to alleviate some of the excesses of the credit boom.

Is bankruptcy a cloud on the horizon?

While consumers have been tightening their belts in the West, the sudden downturn in the UK and US is not solely down to their refusal to spend. Many retailers followed the same line as their customers, borrowing money to finance expansion and acquisitions.

Their highly leveraged approach worked well in the credit bubble, however with banks seemingly on the brink of collapse and unable or unwilling to lend any further, these retailers have found themselves unable to meet their financial commitments with the result being liquidation.

Jeanine van Zyl, retail analyst at Old Mutual Investment Group SA, says it is highly unlikely that South Africa’s famous brand names will find themselves on the scrap heap like their Western counterparts.

“Our retailers have generally got pretty good balance sheets, and their margins are still very strong, so they have a lot of space to pull their margins back before they would start going bankrupt,” says van Zyl.

Echoing Dennis Cope’s earlier view on the current retail climate, van Zyl also notes that while 2008 was really tough for retailers, “we are now looking into a slightly better environment for the consumer,” which should help to bolster sales.

Are retailers likely to start closing down underperforming outlets?

While no bankruptcies are on the horizon in SA, are retailers expected to start streamlining their operations and closing down underperfoming outlets in anticipation of a more severe slowdown?

In the UK, high profile chains such as Marks & Spencer have already announced plans to close certain outlets. Adding to the gloom was a damning new survey by retail consultancy Experian predicting 15% of all UK stores would be standing vacant by the end of 2009.

How likely is this to happen to South Africa’s high street? “Major South African retail has very, very few vacancies, and to the extent that there are some, there still is interest by retailers to take those spaces,” says Wolf Cesman, executive director of Madison Property Fund Managers.

“Our retail property hasn’t been hammered the way UK retail property’s been hammered,” continues Cesman, adding that “We work on escalating rents, rents go up every year. Up to now, it’s been a very, very attractive form of investment.”

Ina Lopion, Director of Sanlam Properties, also notes that any vacancies in the group’s retail portfolio are “still very low,” adding that foot counts at its top retail centres, East Rand Mall and Chatsworth Centre were up by 3% and 2% respectively compared to 2007.

However Lopion notes that the trend is not across the portfolio, with foot counts at the other centres analysed down between 5% and 7%. She says major anchors like Shoprite Checkers, Pick 'n Pay, Woolworths and Mr Price saw excellent growth, though some of the smaller independent retailers had negative turnover growths of up to 40%. 

Signs of an improvement?

Jeanine van Zyl, says that retail spending over the important Christmas period was pretty good, with some of the trading updates slightly better than expected. “It seems that December has shown some surprising upside for the retailers,” she adds.

Van Zyl notes, however, that Christmas retail sales didn’t actually pick up momentum versus the rest of the year, rather they just didn’t drop off any further momentum.

This view was borne out by official retail sales figures released by Statistics SA this month, which showed that retail sales fell just 0.1% in December, a marked decrease from the 4.4% decline seen a month earlier.

Total sales for 2008 were down 2.2% on the year before, marking the first annual fall in nine years. However the better than expected December performance has alleviated some concerns over the health of the retail industry.

Old Mutual’s Van Zyl, Madison Property’s Cesman and Pick n Pay’s Cope all agree on one thing however. They believe that with falling rates and inflation, the outlook for the consumer in 2009 is positive.

That being the case, the extra money in our pockets probably won’t stay there long, which should eventually help to put a smile back on the face of South Africa’s retailers.