SA retail spending at risk

As interest rate hikes bite and high fuel and food inflation persists, South African retail spending is at risk of slowing down significantly. Chris Gilmour explores this issue.

The recent global trend of rising interest rates and higher inflation is being felt in South Africa, where the repo rate was increased in July by 75 basis points and now stands at 5.5%, with the prime rate at 9%. South Africa may still be regarded by many people as a commodity-based economy but in reality it is very much a consumer-based economy, with over 60% of its GDP coming from consumer spending. Within this broad category of consumer spending, it is estimated that around 20% of GDP comes specifically from retail sales.

Stagflation is an ugly word

The combined impact of substantially higher inflation and interest rates is probably going to result in “stagflation”low to negative economic growth coupled with higher inflation. And there are other factors that are causing consumer spending to slow down or decrease, notably the chronically high rate of unemployment. South Africa’s unemployment rate is the highest in the world and there are no signs of it abating.

Anecdotal evidence also suggests that conditions among the very poorly-paid domestic workers have deteriorated in the past couple of years since the coronavirus pandemic. It appears that many South Africans have decided to dispense with the services of their domestic workers as they have a) got used to working from home and have become more adept at cleaning themselves and/or b) they have discovered that jettisoning a domestic worker is one of the easiest ways of saving money. Whatever the reason, it appears that around a quarter of SA’s domestic workers may have lost their jobs since the pandemic started, according to a recent survey by domestic worker labour broking organisation Sweep South. This organisation estimates that approximately 125 000 domestic workers (mostly female) lost their jobs in the past year. Main reasons given were unaffordability and employers “semigrating” or emigrating.

Another factor contributing to cost-push inflation in SA is the gradual return to the office for a great many workers who have largely enjoyed the benefits of working from home until now. Resuming a daily commute, even if it is for substantially less than the traditional five-day working week, will undoubtedly result in an extra cost burden for many people. Higher fuel costs compound the misery.

Although the huge spike in March 2021 masks the exercise to an extent, there is a good visual inverse correlation between retail sales growth and the prime rate, as shown in the graphic below. As interest rates fall, retail sales growth improves and vice-versa:

The one factor that could have conceivably offered a degree of relief to cash-strapped consumers is increased use of credit. Household debt to disposable income has been declining for some time now as consumers became very debt-averse over the past few years and as affordability criteria by banks and retailers were tightened.

But in an increasing interest rate environment coupled with a moribund economy, the credit taps are highly unlikely to be turned on again, for fear of a massive bad debt situation materialising.

In fact, as the following graph from the National Credit Regulator (NCR) illustrates, the percentage of rejected credit applications has been steadily increasing over the past five years. And this graph is only up until the end of the first quarter this year, before the full impact of the last two SARB/MPC rate hikes came about:

Source www.ncr.org.za

So the bottom line is that the retail market generally is likely to remain under considerable strain for the foreseeable future. Non-discretionary retailers such as the food and drug retailers (Pick n Pay, Shoprite, Spar, Clicks and Dischem) should fare better than discretionary retailers such as Truworths, Mr Price, TFG, Woolworths, Massmart and Lewis.  

However, this assumes a level playing field. In reality, certain retailers are going to do much better than others. In the non-discretionary space, Shoprite and Pick n Pay are showing signs via positive recent trading updates that they are coping well with the flagging SA economy. Woolies Food, conversely, is making heavy weather of it and is struggling to maintain market share.

In the clothing space, too, there are two players in the form of Mr Price and TFG that are likely to take market share away from the likes of Truworths and Woolworths.

For more granular detail on SA retail sales analysis, go to www.gilmour-research.co.za.

1 comment

Leave a reply

Please enter your comment!
Please enter your name here

Latest Articles

Boring business billions

The world’s richest people aren’t always building apps or chasing disruption. Here are three stories that reveal how unglamorous industries keep minting billionaires. From billboards to pig farming and car mats, there are many ways to make it big.

Ghost Bites (AB InBev | Jubilee Metals | HCI | Schroder European Real Estate)

With all the news from the first week of January 2026 included in one Ghost Bites, you'll find deal news at AB InBev, Jubilee Metals and HCI. There's also a valuation update at Schroder European Real Estate.

Why ETFs Play a Vital Role in Private Markets

Exchange Traded Funds (ETFs) have emerged as a transformative solution, for public markets and also as a strategic bridge to private market exposure. The border between traditional and alternative asset management is dissolving. Clients are driving the convergence, seeking integrated solutions that blend public and private exposures. Duma Mxenge of Satrix explains.

Ghost Bites (AfroCentric | Aspen | Novus – Mustek)

Aspen announced the disposal of Aspen APAC and the market loved it. AfroCentric is disposing of Activo and the market forgot to notice - for now, at least. And for Novus, a purchase of 3,000 shares has turned out to be very expensive in the Mustek deal.

UNLOCK THE STOCK: Southern Sun

In the 65th edition of Unlock the Stock, Southern Sun joined the platform to talk about the recent numbers and the strategic outlook for the business.

Ghost Bites (Mr Price | NEPI Rockcastle)

Mr Price isn't backing off on the NKD deal, despite the absolute hatred for the transaction from the market. NEPI's pre-close update shows the importance of looking at per-share growth.

Sponsored

Ghost Stories #89: 25 years of Satrix – how indexation changed investing in South Africa

In the year 2000, a lot happened. There was some questionable pop music. There was also the Dot-Com Crisis, followed by a period that saw incredible equity returns in South Africa until the Global Financial Crisis hit in 2007/2008. And during that important period in our local market, we also saw the emergence and initial growth of ETFs in South Africa, spearheaded by Satrix. To reflect on 25 years of ETFs in South Africa, René Basson joined me to share the important milestones and fascinating stories that defined this journey. Join us as we look back on how Satrix made it possible for everyone to own the market.

The Finance Ghost Plugged in with Capitec: Ep 6 (Noodles without borders – bringing miso to Mzansi)

Lu-ise Hattingh and Ruan Botha are a great example of the power and value of travel. After spending time in Japan, they fell in love with the culture and food. As all great entrepreneurs do, they also took the opportunity to learn about the Japanese approach to consumer brands. That curiosity eventually sparked a business idea they brought back home. Today, Lu-ise and Ruan are rolling out Market Kokoro franchise stores in South Africa.

Ghost Stories #88: Cell C – more than just an MVNO engine

Cell C has been on quite the adventure in its efforts to carve out a sustainable competitive position. Cell C has created a profitable business model that goes well beyond the MVNO operations that the market tends to focus on. In this podcast, CEO Jorge Mendes joined me to explain Cell C's business and how they plan to win across key verticals.

Ghost Stories #87: Lessons from 2025 – discipline over drama

As we look back on a fascinating year in the markets, Nico Katzke (Head of Portfolio Solutions at Satrix) delivered a fantastic mix of insights on this podcast that can be applied to your strategy in 2026 and beyond. From being careful not to learn the wrong lessons through to choosing simplicity over complexity, there's a lot of great stuff in here to get you ready for another year in the markets.