t’s the third-largest sector of the economy and a labour-intensive industry in in South Africa. But the retail sector is going through a prolonged rough patch. Save for the three months to June 2019, quarterly retail trade sales have not breached 1.5% since June 2018.

Statistics SA data shows that the last time quarterly retail sales grew more than 3% was in the first three months of 2018. With consumer confidence slumping deep into negative territory in the third quarter of 2019 and consumer inflation at 10-year low, is there any hope that the sector will bounce back in 2020?

Probably not, says Sasfin’s senior equity analyst, Alec Abraham. “Real wage growth, employment growth, consumer confidence, inflation; all of that is not supportive of any retail spending next year. I think the outlook is actually quite negative for 2020 as it has been for the last couple of years.”
Stuck in a vicious cycle
He says SA’s retail sector is now stuck in a vicious cycle where consumers don’t have money to spend. And by not spending as they used to, businesses aren’t making the money they need to increase wages, let alone expand and employ more people.
After Statistics SA reported early in December that retail sales grew by 0.3% in October, Nedbank’s economics unit calculated that cumulative growth for the first 10 months of 2019 was only 1.3%. Given this, said Nedbank, growth for the year as a whole should not be significantly above 1%.
“These figures are further evidence that the weak domestic demand conditions have limited exchange rate pass-through effects and other cost-push factors and kept the inflation outlook benign,” said Nedbank.
These are factors beyond their control and businesses usually rely on pulling growth levers that they can control internally in times like these, like cutting costs and lowering their prices to boost demand. Can SA retailers employ any of these strategies to change their fortunes?
Abrahams says the falling consumer demand is now a systemic problem that retailers cannot solve on their own. “For too long now, you’ve had very low GDP growth, very low and almost negative employment growth, very low real wage growth. That’s been brewing for a number of years now. One to three years of that, you can stomach but not five, six or seven years because it becomes a systemic issue that is very difficult to get out of.”
SA’s unemployment rate now sits at 29.1%. At -7 index points, consumer confidence is at its lowest since the fourth quarter of 2017, meaning that consumers are even less willing to spend, data compiled by First National Bank and the Bureau for Economic Research shows.
Is it all doom and gloom?

However, Pierre Verster, CEO of Protea Capital Management, says while macro-economic data does not inspire confidence the moment, it is probably the best time to buy retail shares.

Share prices of many big retailers have recorded double digit declines since the beginning of this year. The biggest losers are Massmart (-48%); Truworths (-37%) and Shoprite (-27%).

Arguably, these three had their own internal issues to deal with. Massmart lost both its CEO and CFO. Truworths had numerous loss-making UK Office stores that it decided to close this year. And Shoprite’s operations in the rest of Africa faced difficulties, with sales in Angola shrinking by more than 38%.
“In general, except for Clicks, retail shares have been under pressure. But what is important is that most of this gloomy economic outlook has already been discounted in the retail shares.
“Even though the data is still quite negative, it would seem like the expectation gap between what might happen, and reality has narrowed. So, even if the data becomes gloomier, it doesn’t mean retail shares will fall even further,” said Verster.
He says if there’s no movement or if there’s slight improvements in economic data, retail shares might rebound beyond expectations in 2020.