South Africa’s retailers performed robustly in 2016, despite the country seeing its weakest growth in seven years. This is according to EY’s analysis of the 12 largest retailers in South Africa, which account for nearly R600b in annual sales.

EY’s analysis focused on three major retail categories; grocers, speciality and clothing.

In 2016, return on equity’s (ROE’s) were particularly strong for specialty retailers, at 51.6%, while grocery retailers averaged 22.3% and clothing ROE’s were 41.1%.

The grocery retailers had a 62% share of total retail spend, specialty retailers had 23% and clothing retailers achieved 15%. In terms of share of profits, grocery retailers achieved 66%, while speciality and clothing retailers had lower shares at 18% and 16% respectively.

Despite the above, the outlook for South Africa’s retail sector remains sombre, as the retailers try to recover from weak and declining GDP growth, low credit growth, low investment levels and the drought.

What does this mean for retailers in 2017?

• Retail spend continues to recover but it remains fragile.

• Store growth has been marginal as new shopping centres impact trading density, placing a damper on the development for new space requirements.

• Food and pharmaceutical net margins rise, while an overtraded clothing market results in squeezed or flat margins and falling volumes.

• Grocers outperform other retailers, typical of a weak environment.

• Rising inflation, coupled with slow volume and like-for-like sales, along with marginal store growth, is pinching margins and returns.

• Africa’s growth slowed to a two decade low in 2016, but retailers are also extending globally.

• Retailers are responding to the weak environment by focusing on two pillars; customer is pivotal and technology as a key enabler.

Where to from here?

• Rising interest rates and currency depreciation will further strain consumers’ disposable income.

• Retailers with more diversified geographic earnings will be better positioned to withstand the pressures.

• Grocers will face squeezed margins, but are better positioned to report sustainable profit growth.

• Clothing retailers face a multitude of challenges – increasing foreign competitor presence and scale; renewed price pressures as the currency depreciates, and changing consumer expenditure.

• Semi and non-durables remain challenging – being subject to currency depreciation, leading to price increases.

• More expensive consumer finance costs will further depress demand.