Consumption by credit

Woolworths and Massmart’s financial results for the six months to June – published last week – highlight once again the all-consuming character of the credit crunch.

Although Massmart delivered a satisfactory profit growth performance, the Group reported clear evidence of a consumer pullback. Not only has real Group sales growth dipped, but more and more customers are keeping their credit cards well beyond harm’s reach.

Top-end retailer Woolworths is especially vulnerable to the credit crunch. Bad debts have rocketed by 80%, and the retailer has had to hold back on extending new credit.

The retailer has observed a steady deterioration in its consumer spend since last September, and is responding with a distinctly defensive price and cost control strategy, reducing entry-level and basic goods prices to ensure competitiveness. That self-restraint is physically visible too – space growth objectives have shifted from C-stores to fewer, large format, full line food stores. The emphasis has landed squarely on value for money – for the retailer and its customers alike.

The discounted price approach has been less of a challenge for Massmart’s high-volume, low-cost, low-margin divisions, but their supporting promotional efforts have been no less vigorous. And my inbox proves it!

Of course, the higher up the consumption chain, the greater the risk of consumption by credit. Last week, mainstream clothes retailer Truworths reported a 66% growth in its bad debts.

Figures released by the Reserve Bank last week outline the full extent of the proverbial
iceberg. Households are currently using a disturbing 11% of disposable income to pay interest on debt while banks’ bad debts are growing at an alarming pace. There has also been a steep decline in the growth of household net wealth since the second quarter of last year. This month, debt counselling company Consumer Assist said that South Africa needs 2 500 more debt counsellors to service the needs of more than six million debt-beset consumers.

Retail may be on the back foot, but it has planted its other foot firmly in front. Massmart has been particularly vocal about life-beyond-the-tunnel. And, if Absa’s CEO is to be believed, the sector – and its supporters – will be on top of their game come the Soccer World Cup.