In an ideal world, analysts want to see revenues growing on the back of increasing consumer spend as opposed to inflationary growth.
Inflation still emerges as a contentious issue for retail stocks, sparking mixed opinions among analysts.
Some experts remain optimistic, anticipating positive momentum for the sector due to contained inflationary pressures. This outlook extends to both consumer staples and consumer discretionary items.
However, others hold that the situation is more complex for Fast-Moving Consumer Goods (FMCG), particularly because they are non-discretionary. Generally, analysts thought that retail companies benefitted during high inflationary periods as they could pass on increased costs to customers.
In 2022, with inflation surpassing 12%, Choppies stated it dealt with a tough economic situation marked by consistently high inflation, increased interest rates, and unemployment.
The group said this constrained consumer spending and their ability to digest higher prices. Against this background, the group revealed that during that year, sales volumes were lower in many categories, exacerbated by competitor discounting. Choppies openly admitted that cost pressures were “only partly recovered through price increases”.
For its 6-month period ended 30 December 2022, Choppies revenue increased by 8.8% to P 3,535 billion (2021: P 3,248 billion). While this was driven by thirteen new stores, the group noted price growth of 11.1%. Sales volume declined by 2% and excluding the new stores by 7.2% on a comparable basis, according to the group’s results.
Some analysts are of the view that in the longer term, high inflation is detrimental to retailers because it starts to adversely affect customer demand and, consequently, sales volumes.
For example, Sefalana Holdings said that its consumers had to adjust their spending and buying patterns due to inflationary pressures.
“During the Pandemic, we noted a shift away from luxury goods, towards necessities,” the group wrote in its report for the 26 weeks ending October 29, 2023, noting that this trend has continued.
“Consumers have become increasingly price sensitive. This has had an adverse impact on our margins and the margins of our competitors.”
Sefalana’s revenue was P4.7 billion for the reporting period, up 4% from the prior period.
Another school of thought is that in the short term, high or low inflation is fine assuming the retailer can fully pass on the inflation to customers. Experts say the notion that lower inflationary conditions could bolster consumer spending still holds.
Inflation reached 3.5% in December 2023 compared to 12.4% recorded in December 2022.
Simultaneously, Choppies Botswana said its sales increased by 9.4% for its 6-month ended 31 December 2023 results. The group said like-for-like sales growth at 6.7%.
Sales increased to P2.505 million (2022: P2 290 million), with the retailer saying it was supported by volume growth and price inflation.
Inflation is currently within the Bank of Botswana (BoB) target band of 3-6%. It dipped below the lower bound of the range, falling to 2.9% in March and reverting to 3.1% in April. The BoB attributed this decrease to the waning impact of last year’s domestic fuel price hikes, citing base effects as the primary reason.
At its June meeting, Monetary Policy Committee (MPC) projected inflation to remain low but within the objective range in the medium term, averaging 3.6% in 2024 and 4.5% in 2025. The projected low inflation is due to, among others, base effects related to the reversal of value-added tax from 12% to 14% in 2023, subdued domestic demand and the downward revision in recent forecasts of international food prices. Similarly, businesses also expect inflation to be within the medium-term objective range; thus, inflation expectations are aligned with the inflation objective (well anchored).
Analysts argue that the important thing for FMCGs is inventory management – if they can anticipate inflationary changes and move ahead of the changes then that’s when they have greater flexibility and better control over their gross margins.
In 2022, Sefalana said its strong relationships with suppliers helped ensure that it was able to meet stakeholders’ needs by providing the right products at the right price and that stock shortages were minimised. “We were also able to secure large procurement deals in advance of price increases and this allowed us to somewhat delay the inflationary impact for our customers,” the group said adding that its “Botswana FMCG business has, in particular, experienced significant improvement following concerted efforts at margin management and service offerings”.
In an ideal world, analysts want to see revenues growing on the back of increasing consumer spend as opposed to inflationary growth.
Data by Statistics Botswana show that household consumption rose by 5.6% in 2023, up from 3.1% in 2022, driven by declining inflation and stable interest rates throughout the year.
Botswana is a consumer-led economy, with households being an integral part of the economy with respect to expenditure. Statistics Botswana has shown that household final consumption remains the largest component of Botswana’s Gross Domestic Product (GDP), comprising 42.9%.
Households allocate significant proportions of their consumption expenditure to transport, food and housing. Available statistics by one of the top banks still show that around 10% of the households have been appraised to have discretionary spending power. This means that 90% only have enough disposable income to cover just basic necessities of food, housing and transport.
First National Bank Botswana (FNBB) previously found that individuals tend to borrow to “augment declining income levels”. In other words, they borrow for consumption. Households account for the largest share of debt in Botswana. The MPC of the Bank of Botswana reduced the Monetary Policy Rate (MoPR) by 25 basis points from 2.4% to 2.15%. Economists expect reduced borrowing costs to spur borrowing and consequently spending.
Analysts expect to see this spending aligned to retail margins.
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