On the northern outskirts of Joburg, Africa’s newest, biggest shopping centre, the Fourways Mall, has just opened. The size of 20 rugby fields, with a blockbusting 450 stores, the R9bn revamp means it now supersedes the previous megamall to hold that title: Midrand’s Mall of Africa.
Only, it couldn’t have come at a worse time for SA’s retailers. Globally, retail is at a crossroads, as newspapers report daily about some iconic chain having gone bust.
In SA, an economy growing at 0.9% with 29% joblessness means consumers have little discretionary spending. And this in a country that already had the most oversaturated mall space in the world.
The new Fourways Mall is hoping it’ll capture the precious few rands available, what with its new "concept stores" meant to encourage loyalty — like the new Edgars store (with its own kids’ area) and Foschini store (it will host beauty classes and has a full-service Candi & Co hair and beauty salon). The mall will also house Kidzania, a concept imported from Mexico, which aims to be an interactive "city" for children, blending learning and entertainment.
It’s sparkly and new, incorporating all the new fads in "light and space". But the problem is that Fourways Mall feels as if it opened to meet a deadline: a number of shops aren’t ready, not all the bathrooms have soap dispensers, some of the concept stores don’t seem novel but more like lipstick on an old idea.
It smells faintly of desperation — the same retailers fighting for a slice of an ever-diminishing pie in another glitzy mall scarcely different from any other.
A glance at the share prices of the largest SA retailers, hitherto invincible powerhouses, illustrates how badly the engine is misfiring beneath the hood.
Mr Price, the king of cash-based clothing retail, is down 24% over the past year and grocery pin-up stock Shoprite is 45% down over that time. Massmart, which owns Game and Makro, is 61% lower.
Apparel companies haven’t been spared either, with Truworths down 41% and TFG, which owns Foschini, down 17%. Druggist Dis-Chem is down 34% over 12 months and grocer Pick n Pay is 21% lower.
There are, of course, nuances in each case, but the story is the same: sliding sales that reflect retail’s glory days of the early 2000s are long gone.
Asief Mohamed, chief investment officer at Aeon Investment Management, says the meltdown in the JSE’s retail sector is due to a combination of weakening consumer fundamentals and overvalued retail shares.
He also notes that the rate of growth in welfare payments to SA’s 18-million beneficiaries has slowed and is now set to grow by less than inflation.
This will hurt retailers, where much of this money is spent.
But the critical question for investors is this: is now the time to buy, or is the challenge in the economy structural rather than cyclical?
In short, is SA retail broken?
The answer may be a bit of both: that there has been a structural shift, but things will still recover to some extent.
"Shop when they drop" is a snappy adage that investors might apply to heavily marked-down retail counters on the JSE. After all, retail stocks are cheaper than ever.
However, the experts say you shouldn’t bargain on profits recovering soon. If anything, we may not have hit the bottom: share prices could be in for more pain and some retailers might not make it out the other side.
The record will show that it’s been a blazing fire sale across the retail board. Of the 18 JSE-listed "shopping" stocks, only three have moved up over the past year.
"Valuations have fallen significantly, but retail shares are not cheap enough yet," says Mohamed. "Prospective earnings growth will be muted until we see sustainable jobs growth." Aeon will only begin raising its exposure to SA retail once shares have fallen by another 5%-10%, he says.
Evan Walker, veteran retail analyst at 36One Asset Management, is also "steering way clear" of retail stocks. "There are a few standouts but there’s too much space in the retail sector. There’s been no rationalisation and more stores continue to be rolled out."
Many retailers have cut their costs over the past three years but are now about as lean as possible, so there’s little scope on that front. "I still believe gross margins and the selling prices are too high in this environment. No-one is pricing their merchandise for a poor SA consumer, all the way from Pep to Ackermans and Woolworths and Country Road," says Walker.
Syd Vianello, an independent analyst, says the reality is there was no real justification for many of SA’s retailers to trade at such high values on the JSE in the first place.
"At best, some of these counters offered a level of certainty in their profit streams. But on profit growth of 12%, can there really be justification for such demanding earnings multiples?" he asks.
Take Mr Price. Its p:e ratio once surfed above 30 but has halved to 14.
David Holland, a director of Fractal Value Advisors, warns that almost all retail companies on the JSE are ailing. His research shows that the "economic profit growth" of SA retailers is falling fast.
"If investors are choosing which retail share to buy, it might be a key consideration to determine which company is least likely to fall into financial distress," he says.
The return on investment of many SA retailers has fallen to the extent it is probably only just beating their cost of capital. (In the case of Massmart it’s already below that.)
Fractal’s research on Shoprite succinctly sums up retailers’ predicament. Shoprite’s ROIC (return on invested capital) — though still comfortably above the cost of capital — has halved in the past seven years. "Investments are not creating economic value. More emphasis should be placed on efficiency improvements, not investment growth," says Fractal.
Worse: if the squeeze triggers a price war, share prices of local retailers could "fall through the floor", says Holland. Those with high levels of debt will be hit hardest.
This is what we’ve seen in the UK. One-tenth of high street shops are now vacant, says the British Retail Consortium. And the stocks of Marks & Spencer, the 135-year-old grande dame of UK retail, have plunged 20% in a year. Part of the problem is that the retail model has changed entirely over a decade. The internet has changed the way people shop: whereas CD stores were once a mall staple, now people subscribe to Apple Music. And that’s just in one sphere.
As Sasfin Wealth senior equity analyst Alec Abraham says: "The efficiency of online and the cheapness has freed up spending power." And people are spending more on "experiences" than products, sharing the use of assets through companies like Uber and Airbnb. A tip for investors, says Abraham: replace retail stocks with those that have replaced them.
This is why bricks-and-mortar retailers are reinventing themselves as "retailtainment" experiences to recapture spending from websites, as Fourways Mall aims to do.
You see this at the new Sportscene flagship store in Sandton City, which opens this week as an 1,800m² space built around a recording studio, which will house regular classes in music production and artist recording sessions. It will also be the base for Sportscene’s "Put Me On" campaign, which uncovers music talent. But there’ll be more: tattoo artists, sneaker laundry services and a mini basketball court. Will it be enough to get people off their couches?
This is a global trend as mass merchandisers (apart from Walmart) struggle to grow, says Abhishek Kapur, consumer industries leader at EY Africa. Grocery stores are now thinking of offering cooking lessons; fashion outlets are expanding into fashion shows.
"This is happening overseas, not much here yet. But where does this lead to? This is disrupting the world outside SA."
Kapur says members of the younger generation are already connected digitally. "It’s ripe for the taking and the question is, does somebody have the capital and vision to get this done?"
Some online retailers, even in SA, have taken up the challenge — beyond merely the established websites like Takealot.com.
This week a new SA online shop, the Allsale Club, was launched.
It will source half a million branded goods and bring them to SA at cheaper prices. It’s a members-only club with everyday items such as batteries and razors to luxury items such as cologne and watches, based on the business model of Costco, the US multinational.
Locally, SA retailers have struggled to adjust, especially as they also deal with a number of local factors such as crime. Shoprite, for example, had 489 armed robberies and burglaries last year, so it created its own security group. TFG’s cellphone business has also been targeted by robbers. "If we don’t get a hit in a day it’s a good day," says TFG CEO Anthony Thunström.
Another complication seems to be that the psychology of SA shoppers is also different. Research by Nielsen Connect shows that SA is the second-most price-sensitive country in the world. Customers will change stores for a better price, a trend becoming more pronounced.
This has implications for the heavy discounting we see at SA’s malls right now. Says Walker: "Retailers have been forced, in an oversaturated environment, to price themselves differently in terms of discounts."
Physical retailers have reacted to these new trends partly by shrinking. Ninety-year-old Edcon, SA’s largest fashion retailer, nearly hit the wall last year as it battled to repay R2.7bn in debt. Now it is getting rid of a third of its 1,200 stores.
"It’s likely that there will be fewer store rollouts, but a number of destination-type stores to support the brand image [will be built] — more of a place to go to get your fill of the store and experience what it represents," says Abraham.
Even foreign apparel retailers that came in and changed the landscape, such as H&M, Cotton On and Zara, are holding back on expansion.
Property owners are feeling the squeeze too, as restaurants and retailers shut shop. TFG, for instance, paid 12% less for rent last year compared to the year before, quite a knock to mall owners considering TFG has 800,000m² of retail space in SA, second only to Edcon.
Some fear that all the slicing has hurt the businesses. Says Abraham: "Eventually, if you make too many cutbacks, you affect the ability of the company to operate efficiently and to grow when conditions turn, because then you have no capacity. That’s a concern right now."
Still, some investors would be sorely tempted to buy iconic retailers like Shoprite at clearance-sale prices — shares which would have been in almost every investor’s basket a few years ago. But this is only wise if the retail environment recovers.
Wayne McCurrie, FNB’s veteran market commentator, says the duration of the current downturn has worn investors out. "Ultimately you have to believe the local economy is cyclical, and pray there is a three-to four-year upturn in the not-too-distant future. The new ANC executive is slowly starting to make changes," he says.
Perhaps. But many investors in construction stocks argued the same thing. McCurrie says the alternative scenario is ghastly: "If SA indeed has a slow puncture, and we can’t get growth above 1%, then you would not be buying retail shares."
He points to the fact that over the past three decades the JSE’s retail index has undergone a number of dramatic dips. The last time it lured in the deep-value vultures was in the late 1990s and 2001 — a tough period for consumers, as interest rates peaked at 24% in 1998.
There are investors who bought retailers and then made a killing. Shoprite could be snapped up for R5.40 in 2001 — against its current R113. Mr Price hit a low of R4.50 at the time (producing earnings of 32c) and has since risen to R167.
Famously, building supplies company Cashbuild traded at around R2 a share back then, and its stock has soared to R238. (A brave investor who put R10,000 into Cashbuild then would have about R120,000 in the bank today).
But the smart investment would have been in slick clothing retailer Foschini (now TFG). In 1999, the share could be bought for as little as 650c, and has since rallied to R148. Its last dividend paid R7.80 a share.
Brave punters in 1999 who were able to look past the interest rate cycle could have scooped up a number of 10-baggers — companies whose price has risen more than tenfold.
Wilhelm Hertzog, a portfolio manager at Rozendal Partners, says the current malaise in the retail sector could be likened to the platinum sector a few years ago.
Platinum, once the darling of the JSE’s commodity sector, fell out of favour with investors after platinum group metal (PGM) prices buckled. But when sentiment shifted, there was a huge rerating. Impala Platinum, for example, has risen 379% in the past year; Amplats is up 106%.
Hertzog says punters willing to back retailers with the highest debt and lowest margin may well be similarly rewarded, when the cycle turns.
For the more risk-averse, Hertzog recommends food retailers — which tend to show more resilience in tough trading times.
Perhaps it is significant that Woolworths, with the highest percentage of debt among the JSE’s retailers, has started showing signs of bouncing off its three-year lows.
As with every nuanced scenario, some stocks are better bets than others.
Simon Brown of Just One Lap is not averse to investing in the retail space, depending on the share. "The food space is getting interesting; I’m less convinced about the apparel space," he says.
He singles out Shoprite in particular. "People are going to eat and Shoprite is the best retailer on the continent from mid-to lower LSMs.
Retail stocks are cheap, but don’t bargain on profits recovering soon. If anything, we may not have hit the bottom
— What it means
"They catch people as you move down the value chain and catch you moving up as things improve. And they’re a lot better than their competitors," he says.
Woolworths may look to be on the recovery track. But Abraham says one needs to wait: "I would want to see sequential improvements, not just a season before calling a change of fortune."
Equally, Massmart is going through larger problems than just a cyclical slump.
"Structurally, some of their businesses such as Game have lost relevance in the market today," says Abraham. "Massmart is a high-volume, low-margin business in a steadily rising, consistently inflationary environment." By contrast, Clicks "has potential, even in this environment", he says.
The problem is, prices could still tumble further.
"There is only value if there is a cyclical upturn. The drivers of retail are consumer spending and economic growth. If SA is in a structural decline then retail shares could well be a value trap," he says.
All the investor presentations this year have been dire. It’s clear many shoppers are now only buying products when they’re on promotion. Abraham doesn’t see much respite, this year or next. "I see three years of very low growth," he says.
Certainly, there doesn’t seem to be much scope for price increases now.
"Retailers have to invest in price to keep feet coming through the doors. When growth is outstripped by expenses, it is a recipe for disaster. SA consumers are getting poorer. The only solution is for the economy to grow … and, unfortunately, there is nothing retailers can do about that," says Abraham.
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