The JSE's household goods and textiles sector has had a solid run over the past four years as its major customer, the retail industry, has enjoyed the fruits of SA's consumer spending boom.

Household goods manufacturers have generally enjoyed full order books as SA consumers have splashed out on semidurable and durable goods in particular.

The party, however, is slowing down, as successive interest rate hikes and higher household debts have reduced the disposable income of consumers. Though retail sales are still showing year-on-year growth rates of around 10%, this hides vast discrepancies between the relatively buoyant food sector on the one hand and declining growth of furniture and clothing sales on the other.

As key suppliers to the retail sector, household goods companies are directly affected. Furniture manufacturer Steinhoff tried to bridge the gap by buying SA's largest furniture retailer, JD Group, for R15bn. But the deal was blocked by JD minority shareholders in a surprise vote in May. Many analysts see the rejection as a blow to Steinhoff's ambitions of creating a seamless and cost-effective value chain in its SA operation. The group has employed such a strategy in the UK, where it recently bought retailer Homestyle.

The combined JD/Steinhoff group would have had cash flows of R5bn/year and joint market capitalisation of about R50bn. This would have given it the weight and ammunition to strengthen a position as one of Europe's leading furniture manufacturers. Its major manufacturing facilities are in the UK, Germany, Poland, India and Australia.

Steinhoff has been trading at around the R24 level for the past few months, amid uncertainty about whether it could pull off the JD deal. Whether Steinhoff's shares will rise again in the short term is open to question.

Analysts believe that CEO Markus Jooste made a number of strategic errors in his bid for JD. Firstly, he pitched the offer to JD shareholders - 3,6 Steinhoff shares for one share in JD - too low. Second, confident he would win the bid and to avoid a veto by SA's competition authorities, he sold his SA furniture manufacturing business, Steinfurn, to a private equity consortium for R1,4bn. Though Steinfurn is only one of about 10 furniture manufacturers in the group, Steinhoff will now have to rely on imports to meet SA demand for its products.

The only consolation for Jooste is that the failure to buy JD comes at a time when the retailer was starting to experience the first signs of a sales slowdown. JD's reputation had also taken a knock from allegations about unethical lending practices.

SA's two listed textile manufacturers - Seardel and Pals - have different and potentially more serious problems to contend with: cheap Chinese clothing imports. SA clothing retailers last year imported R5,4bn in clothing from China, compared with a mere R300m in 1999, much of this at the expense of the local industry. The impact on SA textile and clothing manufacturers has been devastating, with employment levels dropping by about 30% over the past three years.

Pals' most recent full-year results (to end-June 2006) showed a R1,6m operating loss on unchanged turnover of R64m. Seardel, SA's largest textile group, reported a 7% rise in sales to R2bn in the six months to December 2006, but headline earnings fell 16% to R40m. Both companies have restructured and streamlined in order to remain competitive. However, cheap Chinese imports, coupled with a slowdown in the domestic market, don't bode well for the future.

Some assistance has come from an unlikely quarter - trade unions. They have managed to pressure government to impose import quotas on 31 Chinese clothing products and have convinced SA's largest clothing retailers to source a significant amount of clothing and textiles in SA for the next five years. Details of both initiatives are still unavailable, but they certainly can do no harm to Seardel and Pals.

How effective these measures are remains to be seen. They might cushion textile companies for a year or two, but longer-term they will have to promote competitiveness in their businesses to survive. Investors have a right to remain cautious about both companies.

While SA's textile industry eyes China with fear, to the JSE household goods sector's largest company, Richemont, it is a source of rising fortunes. The luxury brands group, which is ultimately controlled by the Rembrandt family and has a dual listing in Switzerland, has been riding the global economic recovery - to a large extent driven by China's double-digit growth - for two years now. Higher sales growth and operating margins continued in the latest financial year (for the year to March 2007), with turnover up 12% to Euro 4,8bn and operating profit up 24% to Euro 741m. Operating margin is up from less than 9% in 2004 to 19% in financial 2007.

It's difficult to envisage that such big increases can continue, but strong global economic growth, with the exception of the US, looks set to underpin the company's performance for some time to come.

Commenting on the results, Richemont chairman Johann Rupert said he was bullish about the outlook for the group's luxury businesses. He was relying on organic growth, as opposed to new acquisitions, to drive it.

There is some justification for his optimism. Economic growth in the world's 30 largest markets is set to rise by a solid 2,7% this year from 2,5% in 2005, according to the OECD. Europe is still Richemont's largest regional market, contributing 42% of luxury goods sales.

But the faster growth is occurring elsewhere, namely in the emerging markets of Asia-Pacific, which is already contributing 22% of group sales. Sales for its products from this region were up by 24% last year and could rise further, judging from forecasts of Chinese growth once again exceeding the 10% level. The only danger is a sudden collapse of the red-hot Chinese stock market and the subsequent tightening of consumer belts.

Rupert is certainly confident that Asian shoppers will continue to lift Richemont's profits this year. Since Richemont's recovery began, investors have driven the share price from R18 in May 2005 to R44 two years later.

Though investors should not expect a continuation of these growth rates, analysts say the firm has continued upside potential. Apart from its exposure to luxury goods, Richemont will also generate strong cash flows through its 19% stake in tobacco group British American Tobacco (BAT).

The stake in BAT forms a significant part of the value in the share. The tobacco group is a good dividend payer and a significant source of cash. Based on BAT's market capitalisation it represents 40% of Richemont's market value.

With strong cash inflows, the group has strengthened its balance sheet and declared special dividends in each of the past three financial years.

Though it has the firepower for large acquisitions, there is as yet no indication of any deals, particularly in view of the recent high valuations of luxury brands.