Retailers initially benefited from post-election momentum and hopes of Gross Domestic Product growth, but with limited economic reforms materialising, optimism has faded, says the author.
Image: AI LAB
Steven Hurwitz
Retailers initially benefited from post-election momentum and hopes of gross domestic product (GDP) growth, but with limited economic reforms materialising, optimism has faded. The two-pot retirement system was expected to inject billions into consumers’ pockets, with the South African Revenue Service (SARS) last estimating the figure to be around R43 billion.
While still significant compared to the social relief distress grant, it hasn’t had the anticipated impact on retail spending. High taxes on withdrawals and financial strain indicate that consumers used the money to pay for essentials such as school fees and debt rather than discretionary purchases.
The real issue remains South Africa’s sluggish economy. Fourth quarter GDP growth was just 0.6%, largely due to a rebound in agriculture from a weak base, meaning no real per capita improvement. Debt-to-GDP continues to rise, and with the failed budget offering no meaningful infrastructure development, a complete overhaul is needed to drive sustainable growth. South Africans are still getting poorer, and without structural reforms, the country’s economic challenges will persist.
Across the board, retailers have seen declines, but sales performance varies significantly between those targeting different income groups. Lower-middle-income retailers like PEP and Mr Price are holding up better, while middle-upper-income retailers, like Woolworths and Truworths, face more pressure. High-income consumers remain under strain due to sustained high interest rates, whereas lower-income consumers have gained some relief from falling food and fuel prices, boosting their disposable income.
In food retail, Woolworths Food remains one of the strongest performers globally, with solid top-line growth and returns. Shoprite’s Checkers offering is also thriving, taking significant market share from Pick n Pay and Spar. Convenience-focussed retailers, like Spar, are struggling as Checkers Sixty60 gains traction, offering greater ease for shoppers.
Naspers and Prosus’s share prices continue to track Tencent, their largest asset. Despite efforts to grow their e-commerce and food delivery portfolios, Tencent remains the primary driver of their performance. Chinese stocks, including Tencent, have had a strong start to the year, despite early concerns after Tencent was placed on the US Department of Defence’s restricted list, which historically leads to being added to the Office of Foreign Assets Control (OFAC) list, preventing US entities from trading the stock. This caused a significant sell-off initially.
However, several factors have contributed to a rebound. Firstly, there is a perceived improvement in the US’s stance on China, with recent efforts to mediate a peace agreement between Russia and Ukraine raising hopes for improved China-US relations. Secondly, while many believed China was falling behind in tech, especially artificial intelligence (AI), the release of Deepseek, a Chinese AI model, demonstrated that China had caught up with Western advancements. Tencent has integrated Deepseek’s findings into their own AI model, launching the YUANBAO app, which has become the most downloaded app in China.
Additionally, the previously antagonistic relationship between the Chinese government and big tech has improved, with China's President Xi Jinping recently meeting with top CEOs from companies like Tencent and Alibaba. These shifts have contributed to a strong rally in Naspers, Prosus, and Tencent stocks.
Steven Hurwitz, Portfolio Manager at 36ONE Asset Management and Co-Portfolio Manager of the award-winning PPS Managed Fund.
BUSINESS REPORT