South African consumers are in trouble – and these businesses are suffering for it

September restaurant, take-aways and catering data published by Stats SA this week points to strong but slowing year-on-year sales growth.

However, the appearance of strength is misleading, says property sector strategist at FNB, John Loos, as most of the figures are coming off a low base from two years of lockdown in South Africa.

With inflation remaining high and more rate hikes on the way, the sector looks to be in for a difficult period ahead, and consumers come under pressure to keep heads above water.

Restaurants feel the pinch

Apart from the take-aways category, the sales performances in the restaurant sector are still weak in real terms compared to pre-Covid 19 days, and new economic pressures loom, Loos said.

September 2022 StatsSA Restaurant, Take-Aways and Catering Income data showed a slowing in year-on-year growth in income.

Total Food and Beverage Income for the Sector grew by a solid 26.7% year-on-year in September, which is a slower pace compared to the growth rate of 32.9% in August.

Despite this slowing growth in recent months, the growth rate remains very strong. However, Loos said there are two factors at play that continue to deceive the reality of the situation.

“Firstly, there is the low base of which the sector’s income has grown due to an almost complete shutdown of its business at a stage back in 2020, with full lockdown relaxation only being completed more recently,” Loos said.

“Secondly, higher food price inflation translates into significant input cost inflation for the sector recently too.”

The strategist noted that with regular distortions caused by periodic changes in lockdown levels over the last two years, and a subsequent inflation surge in 2022, this means the most accurate way to gauge the health of the sector is to look at pre-lockdown data from 2019.

“Here, one gets a better idea of the relative weakness in this component of retail, despite recent strong growth.”

Total Restaurant, Take-Away and Catering Retail income for September 2022 was still -3.2% below the value of sales in September 2019.

“This implies that it has not made any growth progress since three years ago, still trying to claw back lost ground following the lockdown,” Loos said.

However, the inflation ‘illusion’ still has to be eliminated by using the best available inflation measure to convert to ‘real’ terms.

In inflation-adjusted ‘real’ terms, this is still a very significant -14.5% below the September 2019 level, he said.

Consumers under pressure

While all three sub-sectors – ie, Restaurants and Coffee Shops, Take-Aways and Fast Food and Catering – have been growing positively of late, things are far more volatile than they appear.

“Recent negative economic events have likely begun to force consumers to reprioritize expenditure partly away from non-essential spending such as eating out and take-aways,” Loos said.

September CPI inflation was still high at 7.5%, with food inflation at 11.9%. On Wednesday, Stats SA revealed that inflation climbed even higher, driven by food inflation going up to 12% – the highest levels since the current CPI basket has been tracked.

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Further warning signs are coming, Loos said.

The South African Reserve Bank has hiked interest rates by 275 basis points since November 2021, and is on track to hike by another 50 to 75bp on Thursday.

“This not only raises household costs of servicing their debt, thus eating into disposable income, but also contributes to the current economic slowdown, which in turn constrains employment and household income growth, and thus spending power,” the strategist said.

“This all exerts financial pressure on consumers, and eating out is a luxury spend item that can be reduced in tougher financial times.”

Loos said that, being largely non-essential in nature, there is an expectation that the recently deteriorating economic and consumer environment will continue to slow the growth in the “Restaurant, Take-Aways and Catering” area of retail further in the coming months.

“The very weak performance in sit-down restaurants and coffee shops, compared to pre-Covid-19 performance, continues to place retail centres with a greater focus on this at a relative disadvantage, while focus on the Fast Foods and Take-Aways category appears to be more beneficial,” he said.

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