If 2002 was a good year for retailers, 2003 was even better. Many retail stocks were at record highs. There are some notable exceptions, such as Edcon and Foschini, but it surely can't be long now before they, too, reach new peaks.
The general retailers index (GRI) has continued to strengthen against the broad financial & industrial index (Findi) and now stands at 114%, up from 90% a year ago. The GRI, which used to be rated on a healthy premium to the Findi, is clawing its way back there. The food & drug retailers index has also strengthened against the Findi, though not to the same degree.
There are good fundamental reasons for this outperformance. Unlike many manufacturing companies, which suffered from the strong rand, local retailers benefited from a progressive reduction in interest rates, especially in clothing and furniture.
The various retail sectors - food, clothing and furniture - all had different challenges but none so acute as the food retailers. Their main challenge was deflation in certain categories, notably commodity products such as maize meal. It is difficult to increase revenue in these categories when prices are falling, as consumers do not necessarily consume more food just because it is cheaper, especially at the commodity end of the market.
IT retailer Connection Group, the owner of Incredible Connection (Incredible), also had to contend with deflation as a direct result of the lower US dollar prices of IT hardware, coupled with a stronger rand. But Incredible's product range is big-ticket computer hardware and software, very different from commodity-type food. And demand soared for computer products last year, more than compensating for the decline in prices. Massmart, too, fought off the effects of deflation in this way in many of its operations.
The large clothing chains once again had a great year, but none enjoyed as much success as Edcon. The share price has followed suit, virtually tripling in a year, from R53,50 to R133,50. Though it will become more and more difficult to extract growth from the Edgars chain itself, there are other opportunities, especially at CNA, which is coming off a low base in several respects. Already Edcon is using its merchandising system at CNA and the results are encouraging. Edcon CEO Steve Ross has been doing great things with stock-turn ratios in the clothing retailer and he says there's no reason why similar movement can't be achieved at CNA as well.
Foschini's earnings have also risen sharply and Truworths, the benchmark fashion clothing retailer, managed to achieve strong earnings growth from a high base.
The real action, though, was in the furniture business. Traditionally, this is the last part of the retail industry to benefit from an upturn in consumer spending, lagging behind clothing and other semi- and nondurable consumer goods. But the consolidation in retail furniture, following JD Group's acquisition of Profurn in early 2003, helped all the players. JD Group has scaled down the Profurn chain and almost entirely incorporated it, with only the last part of the integrated IT platform to go.
Ellerine acquired Wetherlys last year - an excellent fit. There are no overlaps in the markets they serve; Ellerine is at the lower end and Wetherlys at the top.
The retailer facing the most varied challenges during the year was undoubtedly New Clicks. In early 2003, it was on the threshold of realising founder Jack Goldin's dream of becoming a US-type drug-store chain. That dream was all but shattered in early 2004, as the authorities did an abrupt U-turn on the "single exit pricing system" for retail pharmacies. That made the whole concept of medicine retailing far less attractive. Recently there have been court actions over drug pricing and the New Clicks experience will be used as a warning by those who believe a retailer should never place too much reliance on one product.
In 2003, New Clicks also had to contend with the disposal of its Australian operation as well as a radical revamp of the Clicks store chain.
The immediate future of the retail sector will be driven by interest rates. If there aren't too many shocks to the system, such as rates going up by more than two percentage points, retailers will probably be able to accommodate rises.
