Retail Confidence Rising

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Last week, after an extensive strategic review a few months ago, Woolworths announced that it would be buying out its 76 South African franchisees. Simplifying the complexity of business was the main driving force behind the decision and cutting out franchisees is the easiest way to accomplish that. Franchisees only account for 10% of Woolies’ turnover and recently their performance has been disappointing. "It's important to protect your brand; if the franchisees are not doing well, it's better to be the captain of your own ship," said Du Plessis, chief investment officer at Gryphon Asset management. Thanks to good financial results over the past year, Woolies has cash available to fund the buyout. Woolworths have also opened discussion about the future of their African franchises.

Business confidence rebounded in the third quarter, reaching its highest level in two-and-a-half years. A surge of optimism within the motor industry and the trade sector was the main driver of the jump in the business confidence index produced by Rand Merchant Bank (RMB) and the Bureau for Economic Research. That drove the overall index up from 36 in the second quarter to 47 in the third quarter, its highest since the first quarter of 2008, though still well below the neutral level of 50.

New vehicle dealer confidence rose to its highest level in 4 years when its index points surged up to 79 from 49. The industry as a whole enjoyed massive improvements, and sales grew by almost 37% on the year last month and close to 13% higher than July. Despite these positive results, the impact of the carbon tax is yet to be seen.

Retail confidence also climbed, rising by 14 index points to 52 and wiping out all the losses of the second quarter. Wholesale confidence rose to 50 from 47. That was also in line with more positive data on the retail sector — SA’s fourth-biggest — and a recovery in consumer spending, the main growth engine of the economy.

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Hard Stuff

The current inflationary environment is producing some mixed movements – amongst brands and consumers alike. Alcohol and tobacco products are showing themselves to be less discretionary than other non-essential items. Alcohol, in particular, is proving distinctly resilient in the face of an overarching consumer pullback. This says a lot about the power of the lifestyle choices that drive demand. But it’s also a function of circumstances.

One of the contributory factors to the ‘sin’ goods’ resilience is a shift from out-of-home to in-home consumption. Local restaurants and pubs have confirmed a decline in traffic which in its turn is partly attributable to soaring fuel prices.

But the hard stuff isn’t untouchable. Pick n Pay reports a downgrading trend within these product categories – from premium to mainstream, and from mainstream to economy. SAB, whose products are just as stable as food, have noticed the same tendency to trade down. Mainstream beer brands are performing exceptionally well, while premium and speciality products are slowing.

In the US, the inverse holds true. According to research published by Nielsen in July, higher priced brands like wine and spirits traditionally hold up better than lower priced ones during economic cycles. This is because there is enough strength in the upper income groups – who are more disposed to those products – to withstand the storm. Data collected from the major retail stores revealed a 5.4% increase in spirits sales in May, and a 9% increase in total liquor sales.

But, regardless of the intra-category differences, alcohol represents a needful - and somehow always affordable – luxury. And it’s ironically reassuring that these vice spends can be relied upon to buck national spending trends when the going gets tough.