Retail sector may surprise us

There are clear indications that retail sales and food demand will improve despite the current financial crisis.
Issue date : 24 April 2009

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There are clear indications that retail sales and food demand will improve despite the current financial crisis.

Since 1994, the retail sector in South Africa has benefited from a fast-growing consumer market. But the financial crisis that started in 2007 and worsened in 2008, coupled with local high interest rates, food prices and new credit legislation, changed this. Suddenly consumers cut back and retail sales growth became negative.
This also impacted on the agricultural sector in 2008, with lower grain and protein prices. While the international crisis may still intensify and we’ve probably not felt the total effect yet, there are, however, distinct signs that things are looking better for the retail market and therefore also for agriculture.

Increase in consumer spending
Real (inflation-adjusted) retail sales increased in January by 1,7% for first time in nine months, compared to the same month of the previous year. This was the first positive figure in nine months and the highest figure in 11 months. But sales didn’t increase evenly in all types of shops. Compared to the same quarter of the previous period, total retail sales increased by 11,7% at current prices.

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General dealers contributed 5,4 percentage points, textile, clothing and footwear stores 2,6 percentage points and specialised food, beverage and tobacco stores 1,8 percentage points, while retailers in household furniture, appliances and equipment contributed a negative -0,6 percentage points. Final household consumption expenditure increased in real terms by 2,3% in 2008, down on the previous year’s 6,6% growth, but still positive. Food expenditure increased by 1,6%, compared to the previous year’s 5%. Although lower, these figures are still positive.

While there is a lack of hard evidence, there are indications that consumers are back in the shops. Beef sales have increased since late last year. Industry sources believe more consumers stayed at home during the December holidays and spent the money they saved to buy more food and especially more meat. Consumers also shifted from takeaways to meals at home, which increased meat consumption. Potato sales increased as people bought them as a cheap source of energy. Consumer debt increased from 50% of disposable income in 2002 to 76,9% in 2007 and decreased marginally to 76,7% in 2008. Consumer debt as a percentage of disposable income eased to 76,4% in the fourth quarter of 2008 from a peak of 78,2% Private sector credit extension slowed down to 11,1% year-on-year in February 2009 from the previous month’s 11,9%.

Expectations are that credit uptake by consumers will ease further during this year. Economists predict a 2 to 2,5 percentage point increase in interest rates this year, which will result in less debt and increased disposable income, but the new credit act will prevent too much credit uptake. Lower interest rates have improved consumers’ cash flow. Higher social grants also helped to put more money in consumers’ pockets. All these factors combine to improve the demand for agricultural products and especially for basic foods. In difficult times, consumers move to less expensive brands or less expensive retail outlets. They spend less on fast food and more on basic food for home consumption. Less money is spent on luxuries.

Implications for agriculture
Lower international demand for commodities has already resulted in lower fuel, fertiliser and grain prices. Farmers can look forward to slightly lower production costs than in 2008. Lower interest rates will also provide farmers with more farm income after interest payments.

Consumer demand for food and especially for basic, unprocessed food such as meat, milk, grains and vegetables has increased, as consumers downgraded to less expensive but, in many cases, more nutritious and healthier food. The demand for agricultural produce has already picked up and will improve in the coming year.

Farmers be prepared
Farmers must ensure they’re ready to produce according to the needs of a growing and more affluent population. The fundamental factors which drove food prices in 2007 are still active. Economic growth in the emerging countries, while still lower than in 2007, is still high enough to push demand growth. World food production won’t increase quickly as low product prices and high input prices put pressure on farm margins. Current world prices are much lower than in 2007, but much higher than during the previous five years. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy.     |fw