South African consumers are increasingly relying on credit for purchasing discretionary items like clothing and homewares, according to company earnings reports. This trend underscores the financial strain on households and the growing risks faced by retailers in Africa’s most advanced economy.
South Africa is grappling with a complex economic landscape marked by high inflation, rapidly increasing interest rates, sluggish wage growth, and frequent electricity blackouts. Approximately one-third of the workforce is unemployed, adding to the economic challenges.
The impact of these factors is becoming increasingly evident in the financial results of retailers.
Mark Blair, the CEO of clothing retailer Mr Price expressed, “There’s no doubt that credit has been fueling the system for at least the last 12 months.” Mr Price, which primarily serves low-to-middle income customers, reported an 8.3% increase in credit-based sales for the year ending April 1.
Credit applications surged by 30.9% year-on-year, while the net bad debt ratio rose to 8.4% from 6.0% compared to the previous year. Find out all about the Mr Price Store Account
While South African inflation has eased to a 13-month low as of Wednesday, it still averaged 6.9% for the year ending March 31, up from 4.5% the previous year. To combat inflation, the South African Reserve Bank has raised interest rates by a total of 475 basis points since initiating a tightening policy in November 2021. This has made it more expensive for consumers and businesses to manage their debt.
Retailers are further challenged by the persistent power blackouts, which sometimes extend to 10 hours a day. These blackouts reduce trading hours and add to operational costs, with many retailers forced to rely on diesel generators to maintain operations.