By now the market is in general agreement that the world is heading towards a recession, from the US, where the slide has been most severe, to the UK, where buoyant sales are expected to fall off post-festive season shopping. The length of the recession is not expected to drag much beyond the first half of 2002. However, how deep and how far reaching will depend on global consumer confidence, and economic stimulus packages in the US, a country key to global recovery. For retailers, this period poses a number of threats, but also opportunities.

M&A Activity
The global economy may be on the brink of a sharp increase in the number of mergers and acquisitions in the New Year. The deflation of company profits, and resulting downturn in share prices, will make strategic business acquisitions in the market more tempting. At the same time, reduced profits and mounting excess capacity in the manufacturing and production sector will raise the need for consolidation within the industry.

Changing Consumer Spending Patterns
Although retail sales have taken a hit in the US, discount retailers have actually seen their market share grow. Wal-Mart, Target, Dollar stores and their like have seen an increase in traffic, as consumers become more price conscious. Although the trend may appear short term, an opportunity exists for these stores to permanently increase market share.

Shifts in Labour
The past few months have seen job cuts in the US, Europe and Australia, although mainly in the aeronautics industry, the cuts have now extended to associated industries. Bad news for Australia and Europe (where unemployment is climbing towards double digits), good news for America? Possibly. Low unemployment has had its own problems. The US has been plagued by skills shortages and declining work attitudes in recent times.

Cutting Costs
As the market contracts, companies are becoming increasingly accountable to stakeholders for their cost management practices. The ability to reduce costs while maintaining output will define companies in terms of good management. Cutting costs during down periods is a sensitive and delicate issue. Cutting too little may be ineffective, cutting in the wrong areas, destructive. Overcompensating may leave the company wrong footed for when the economy begins to pick up.

Stock Management
As demand falls, retailers and manufacturers find themselves overstocked. The costs to the company can be crippling, for many retailers we can expect to see a rise in discounting as retailers look to push product lines off the shelves. Although a short-term solution, heavy discounting will impact profitability in the medium term, and possibly share valuations in the long-term as companies fail to meet annual growth targets. Companies best placed to weather volatility in stock levels, are those with efficiencies in the supply chain. Just in Time practices, means that during times of fall-off in demand, stores can reduce the number of deliveries per day/week, while maintaining an optimal level of stock in-store, and in regional warehouses.

Private Label Goods
As part of the consumer shift to discount retailers in recent months, research firm AC Nielson has seen an increase in the sales of Store Brands in 55 of the 61 categories measured in the US market. The significance of this, is that much like the US, Private Labels have failed to make as marked an impression in the South African market as they have in Europe. Once again it is important not to view this as a temporary windfall, but as the beginning of an opportunity to increase market awareness of Private Labels as comparable goods to regular brands.

Private Labels encapsulate a number of benefits to the retailer, including bigger margins, and a means by which to differentiate one's merchandise. There is the opportunity to use this period or price-consciousness to increase the consumer base. Once the market begins to warm, and consumers move back to their regular brands, it is hoped that a significant number of consumers will continue to purchase Store Labels.

How will SA be affected?
The concern for the South African economy lies in the global impact on the import/export market, the exchange rate, and commodity prices. Before the events of September 11th, South Africa was in a good position to weather the slowdown that was then affecting the US market.

Since September, the Rand has continued to slide further, due to events in neighbouring Zimbabwe, delays and confusion over the deregulation of Telkom, and general apprehension over emerging market currencies. Although the depreciating Rand does assist the export market, a drop in global demand may see the depreciating currency doing more harm than good through inflationary pressures.

One good piece of news is the drop in oil prices during the period, alleviating additional inflationary pressures. Interest rates may fall still further in the New Year, depending on the state of the currency, but will eventually rise further into the year to protect the target CPIX rate when the global economy turns the corner.

Fiscal discipline in the South African economy is beginning to pay dividends, as the domestic market looks set to weather the slowing global economy, far better than most could hope.

Source: Mark Wilson, Centre for Business Knowledge, 021 410 5543

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