Director: Corporate-911
In the past, you could stand back and confidently say that South Africa is largely insulated against the challenges experienced by other countries around the world. Challenges that impact their markets would be significantly different from ours; and even if we did experience the same challenges, they would get to our market so late that we could use coping mechanisms from other countries to address these challenges. Retailers are particularly impacted
This has changed significantly over the past ten years. Not only has globalization allowed South Africa to catch up with the rest of the world, the Fourth Industrial Revolution has created such a digitally connected society that we often refer to the global retail market as opposed to markets in isolation.
This means that any perfect storm that presents challenges in one market will present challenges in many markets. An article by the Gordon Brothers identifies some major challenges that are threatening to cause a perfect retail storm in Australia, and they are not challenges that are unique to that market.
Ongoing supply chain issues compound current retail challenges
The article points out that Despite the government subsidies, the ongoing global supply chain crisis has resulted in delays in inventory orders and a significant increase in freight costs. In response, many retailers pre-ordered inventory, which resulted in some retailers now carrying significantly large amounts of excess inventory, which is already exacerbated by stores holding excess inventory following the 2021 lockdowns.
On a positive note, the Shanghai containerised freight index, which measures worldwide sea freight rates for imports from China, has been declining over the last few months and may provide some cost relief to retailers soon. Additionally, congestion at the Port of Shanghai, the largest port in the world, appears to be easing. Recent data showed there are approximately 130 vessels awaiting berth compared to more than 300 vessels only a few months ago. The average waiting time across all vessel types, including tankers, bulkers and containers, at Shanghai has reduced to 28 hours, which is down considerably from its peak average waiting time of 66 hours during the lockdown in China.
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Macroeconomic factors signal trouble ahead
The article points out that as stores are reopening, many retailers are experiencing manpower shortages. Workers are seeking new challenges, creating both a labour and a skills shortage. Additionally, the wage increases established by the Fair Work Commission as of July 1 are affecting retailer operations and costs. With landlord abatements now coming to an end, some retailers are also reporting rental increases of around 5% for specialty stores and 4% for large store chains.
Household savings were 7% of disposable income at the end of 2019. This savings rate peaked at 23.7% in June 2020. By March 2022, the savings rate had fallen back to 11.4%, although it is still much higher than pre-COVID-19 levels. This is expected to decline further through the remainder of the year as revenge spending continues, particularly as the borders opening for travel. With the annual inflation rate in Australia surging to 6.1% in June because of new dwellings and rising fuel costs, many expect inflation to continue and potentially peak at around 8% in the coming months.
There is a completely different challenge in South Africa. We are facing a massive unemployment crisis with major companies such as Comair, Tongaat Hulett (who may have to embark on a retrenchment drive as part of their business rescue plan), and the South African Post Office retrenching staff to address operational issues.
South Africa is also in a different situation than Australia in that, according to research by the RCS Group, many South African households are lending money to see them to the end of the month.
Household Discretionary and Non-Discretionary Spending
The article points out that, with inflation and operating costs increases, online channel growth, lower demand and excess inventory, retailers may choose to discount their inventory, sacrificing margin to maintain or increase working capital.
Many retailers will face liquidity issues as working capital is tied up in inventory. Gordon Brothers expects midsized retailers will be hit first, creating mergers and acquisitions opportunities for larger organizations. We predict retailers in the fast-fashion apparel and footwear sectors within consumer discretionary goods could face significant headwinds over the next few months.
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Considerations for retailers
The Gordon Brothers article points out that retailers will need to look at ways to lower costs, streamline operations and reduce disruptions to avoid losing their competitiveness. With increased wage costs, lack of manpower, and continued investment in digital platforms and data infrastructure with the growth in online shopping, retailers must act.
Despite some retailers reporting strong sales because of the growth in online sales, net profits declined. Total sales for the Super Retail Group, one of Australia and New Zealand’s largest retailers, increased by 2.8% in the 2022 fiscal year supported by record online sales, which increased by 44% while net profit fell by 20%. Westfarmers, one of Australia’s largest employers, recently announced plans to renew its portfolio, which include optimising its store network following a 2.9% decline in net profit after tax.
The article adds that some traditional retailers may have too many stores or are over spaced. Retailers that deliver a remarkable consumer experience and have purpose in their product or company, regardless of channel, are closing very few stores. In fact, some are expanding their brick-and-mortar footprint, but it is about rightsizing the portfolio whether internationally or locally by way of location, size and footprint. We have already seen major national retailers like David Jones and Myer reducing their store occupancy space, while other retailers like the Super Retail Group are expanding their store network to create brand scale and awareness.
Re-evaluating the business is key for future growth, and sometimes it is a matter of transforming credit and financing. There is a range of solutions to consider, including identifying, unlocking and optimising unrecognised value, whether this is through revaluation, inventory optimisation or lending. These solutions can realise additional capital for growth or support a restructure when current lenders may not be able to advance additional funds and need to deleverage their exposure.
The article points out that, for example, a retailer’s assets could take the form of tangible assets, such as inventory, cash, property, or plant and equipment, and intangible assets, such as intellectual property, including trade names and patents. Revaluing these assets can increase the value of the retail business and enable access to more credit. If a retailer has a lot of relatively lower-value assets in the form of inventory, the business will need to have a well-thought-out strategy to realise assets most effectively and maximise their value with special situations financing.
Time will tell what the coming months will bring for retailers facing a perfect storm of challenges never seen before. The only certainty is change and retailers will need to adapt to weather the storm.
Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner
