The retail sector is facing additional cost pressures amid infrastructure failures – such as load shedding and port congestion – putting added pressure on their profit margins.
In the current environment, according to Isana Cordier, Absa’s head for Consumer Goods and Services Sector Coverage, in an interview with Business Report, these businesses were not able to pass these costs onto the consumer, which further eroded the bottom line.
“Retail is traditionally a self-funded business, but the looming loss environment and slower stock turnovers could result in increased levels of debt, which then leads to additional interest rate charges having to be absorbed by the business,” Cordier said.
Giving an overview of the sector, Cordier said the impact of consumers under pressure started to surface in retailers’ results towards the second half of last year.
This included the Food and Grocery Retail sector, which equated to more than half of consumer spending being non-discretionary and signalling a significant level of concern.
“Higher interest rates, fuel increases and inflationary costs have been accumulating immense pressure on consumers, with mid- to upper-income brackets also feeling the pinch.
“Black Friday and December trading was muted as consumers shopped for value deals, resulting in very focused shoppers with smaller basket sizes.
“Spending is also skewed more to month-end when salaries are paid, even in the mid- to higher-income spending bracket. This is resulting in a battle for value and there are clear winners and losers in market share.
“We are seeing negative growth in many cases once inflationary increases are accounted for, highlighting the aforesaid reality,” Cordier said.
And according to James Noble, the head of Wholesale, Retail and Franchise at Absa, operational expenses had a significant influence on the profitability and viability of businesses.
Operational expenses included the cost of overcoming load shedding, the cost of electricity, rentals and labour.
“Gross profit margins are also impacted by the rising cost of goods from suppliers. In addition the cost of transport, due to continuous fuel price increases (with another on the cards), significantly contributes to the challenges that businesses face due to the impact on the whole value chain,” he added.
Meanwhile, Cordier said this year would be one of consumers tightening their belts as consumer goods and services and retail clients implemented strategies to cut costs, restructure balance sheets and reorganise their businesses to be leaner and have a lower cost to serve.
BUSINESS REPORT