Temu and Shein are breaking South African retailers

 ·19 Jun 2024

Business confidence among retailers may be back at the long-term average, but those in domestic clothing retailers are being hit hard by online competitors like Shein.

According to the Bureau for Economic Research’s Retail Survey for 2024Q2, business confidence among retailers increased by 5 percentage points to 39%, which is level with the long-term average.

The survey was notably done before the general election, which led to substantial uncertainty in respondents’ outlook.

“Less load-shedding than expected and a slight moderation in headline inflation may have
boosted retail confidence,” said the BER.

“This was likely countered by political uncertainty surrounding the election and the expectation that interest rates may remain higher for longer than anticipated at the start of the year.”

There is also a significant variation in the differing retail subcategories.

Confidence among semi-durable goods retailers, such as textiles, clothing, footwear, and leather goods dropped from 38% in 2024Q1 to 68%.

The drop in confidence follows weak sales in 2024Q1 following a high base period following the Covid-19 pandemic and the 2023 Rugby World Cup.

Online competitors like Temu and Shein may also be straining the sales of domestic clothing retailers.

Confidence among furniture retailers and new vehicle dealers also dropped, with these sectors also vulnerable to high interest rates.

That said, retailers in non-durable goods and hardware reported improved confidence.

“Despite improved confidence, retailers of non-durable goods are more pessimistic about sales
volumes than during the first quarter,” said the BER.

“Stats SA reported a 1.9% increase in sales volumes for the first quarter, but the BER survey results suggest that the trend may weaken this quarter.”

Hardware retailers are far more bullish, with confidence more than tripling from 15% to 47%.

For the first time in two years, hardware retailers’ confidence was near the long-term average, with the index tracking the volume of orders placed by hardware retailers increasing from -28 to 21 index points (against the long-term average of -21), supporting the bullish sales outlook.

“Looking ahead, less load-shedding than in 2023, a moderation of inflation and (hopefully) less political uncertainty, once the new parliament has been announced, may boost the sector,” said the BER.

“However, consumers’ real disposable income will be constrained for as long as real interest rates remain high, with a particular impact on furniture retailers and new vehicle dealers.”

Time almost up

While Shein and other retailers like Temu have been putting local retailers under pressure, tax changes expected to come into effect from 1 July may put a stop to this.

From 1 July, the South African Revenue Service (SARS) has committed to tax all clothing parcels with an import duty of 45% plus VAT, breaking the tax loophole these importers have been able to exploit to get products into the country for cheap.

The so-called de minimis rule allowed Shein and Temu to get clothing parcels of under R500 through customs with a 20% import duty and 0% VAT.

Mark Goodger, CEO and founder of Maritime Legal Solutions and Chartered Tax Adviser from the South African Institute of Taxation told Broad Media that in terms of high-volume, low-value consolidated shipments, it is apparent that Shein and Temu used this provision.

Clothing retailers complained that they always had to pay the 45% plus VAT rate for imported clothes, putting them at a disadvantage to direct-from-China importers like Temu and Shein.

SARS is now closing this exploit to level the playing field.

Read: Property set to shine in South Africa

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