RETAIL
TRADING ENVIRONMENT
AGAINST THE WEAK ECONOMIC ENVIRONMENT IN THE AFTERMATH OF THE COVID-19 PANDEMIC, THE RUSSIAN INVASION OF UKRAINE IN FEBRUARY 2022 RESULTED IN HIGHER ENERGY PRICES GLOBALLY AND SEVERE PRESSURE ON FOOD RESOURCES, WHICH HAS LED TO SIGNIFICANTLY INCREASED LEVELS OF INFLATION IN MANY PARTS OF THE WORLD. THESE FACTORS HAVE PRESENTED CHALLENGES FOR RETAIL TRADING IN THE GROUP’S MAJOR MARKETS OF SOUTH AFRICA (SA) AND THE UNITED KINGDOM (UK).
SOUTH AFRICA: TRUWORTHS
Despite periods of macro headwinds in SA over decades, the country has shown remarkable resilience. Truworths has prospered in South Africa for 105 years and, despite the various challenges faced over the years, is today positioned as:
- One of SA's leading national fashion retailers with an assortment of owned brands that are the envy of competitors;
- A retail and digital presence in all major shopping nodes and customer groups in SA;
- A strong balance sheet with significant cash generative capabilities;
- Well above norm returns on equity and invested capital; and
- A unique, well-established and proven DNA.
At this moment in time, global geopolitical events together with challenges in the domestic economy have combined to negatively impact the South African consumer. Spending has come under pressure as rising prices erode disposable income. Fuel costs rose by over 60% between January and June 2022, electricity prices increased by 16% for the 2021/2022 period while food price inflation measured 8.6% for June 2022. These factors contributed to the consumer price index (CPI) increasing by 7.4% year-on-year for June 2022. This upward trend continued after the Group's period-end, with CPI reaching a 13-year high of 7.8% in July 2022.
Rising borrowing costs have compounded consumer challenges. After the SA Reserve Bank maintained its benchmark repo rate at a record low level of 3.5% throughout the pandemic, interest rates have progressively been increased by a total of 275 basis points since November 2021 in response to the rising inflation. This includes a 75 basis points hike in both July and September 2022.
While Truworths emerged from the COVID-19 pandemic with a good quality account portfolio equivalent to the quality before the pandemic, the macro credit environment started showing signs of stress towards the end of the reporting period and is expected to deteriorate into the 2023 financial year owing to mounting financial pressure on consumers.
The TransUnion Consumer Credit Index, which measures the credit health of consumers, fell to 49 index points in the second quarter of calendar 2022 from 55 points in the first quarter, and down from 60 points a year earlier. The adverse movement in the index reflects the deterioration in household credit health as higher living costs have taken their toll on consumers' domestic finances.
SA's labour market, which was severely impacted by COVID-19 in 2020 and 2021, has shown minimal improvement in 2022 as the unemployment rate measured 33.9% at June 2022 (June 2021: 34.4%). There are currently 8.0 million unemployed South Africans and the prospects for sustainable job creation in the short to medium term are limited given the lack of economic growth in the country.
SA encountered a devastating outbreak of civil unrest that spread across parts of KwaZulu-Natal and Gauteng in July 2021. Widespread vandalism and looting had a significant impact on the people and the economy of the regions. The retail sector was particularly hit hard, with over 3 000 retail outlets being damaged, including 57 stores across the Truworths store portfolio. While most formal retail was restored within a few months of the civil unrest, the violence had a profound impact on the lives and livelihoods of people in the affected areas and trading has been slow to recover.
The KwaZulu-Natal region also experienced catastrophic flooding in April 2022, which sadly resulted in the loss of hundreds of lives and devastating damage to infrastructure which left thousands of people homeless. While trading was negatively affected in the short term, the major impact was on the supply chain owing to the damage to the road and rail infrastructure.
Power supply interruptions from the national electricity utility, Eskom, intensified in the second half of the financial period and continued to disrupt trade in Truworths' South African stores. Currently, only about half of the top 100 stores by sales value are linked to alternative power supplies as some landlords have been slow to install generators in malls.
The country experienced 1 008 hours of scheduled power outages (source: Council for Scientific and Industrial Research) in the first six months of the 2022 calendar year, slightly below the level of 1 165 hours for the entire 2021 calendar year.
Over the years, Truworths has found that periods of macroeconomic headwinds often present opportunities to transform and reenergise. The COVID-19 pandemic was such a period and so the headwinds currently being faced are seen as a period of innovation and opportunity albeit with caution.
The key factors which are expected to influence the retail trading environment in SA and the UK in the 2023 financial period
are featured in the Review of 2022 and Outlook for 2023 and in the Chief Executive Officer's report.
UNITED KINGDOM: OFFICE
The pandemic period was a challenging one for the world and Office faced the same challenges faced by all businesses. Yet during the pandemic, Office proved to be remarkably resilient and emerged better placed after the pandemic than prior to the pandemic.
Office now has a strong balance sheet, very solid returns on invested capital and with enhanced relationships with its customers and with its key brand suppliers.
The UK macro environment, much like the rest of the world, faces rapidly increasing fuel and energy prices, and rising living costs which have contributed to a deteriorating consumer spending environment as inflation reached 9.4% in June 2022, its highest level in four decades.
Rising prices in the post-pandemic environment have been exacerbated by the severe oil and gas supply disruptions following the war in Ukraine, with both reaching record price levels.
The Bank of England raised interest rates six times since December 2021 in an attempt to curb inflation, with the most recent increase of 50 basis points being the biggest in 27 years.
Higher inflation and economic uncertainty have dampened sentiment, with the consumer confidence index reaching a record low of -41 points in June 2022, even lower than the level recorded during the height of the COVID-19 pandemic in 2020.
While Office's store sales recovered strongly after lockdown and fewer stores than planned were closed in the past year, the UK retail market saw over 17 200 chain store outlets closing in 2021 (source: Local Data Company). This is mainly due to the impact of the pandemic and the acceleration of online shopping, while certain well-known fashion and department stores that were on the brink of collapse in 2020 finally closed during 2021.
The retail sector will continue to encounter headwinds as inflationary pressures intensify in the months ahead and the central bank expects inflation to remain at very high levels throughout 2023, compounded by the muted outlook for growth of the UK economy.
However, the Office business with its fortitude and strengths after emerging so well from the challenging pandemic era will once again face the headwinds with confidence.
