Driving riches: While the car segment struggles, luxury goods are sustained

The retail sector in South Africa has seen mixed fortunes in recent months, with a slowdown in vehicle sales, but encouraging news in luxury goods. New passenger vehicle sales, which constitute just under two-thirds of overall automotive sales, fell 9% yearon-year (y-o-y) in September 2015, on top of a 8.2% y-o-y decline in August, according to the Department of Trade and Industry. However, y-o-y vehicle exports increased 14.3% in September 2015, over the same period the year before. Auto sales are a key indicator of household spending and have been slowing since the start of 2015, due to a weaker rand, rising indebtedness and low consumer confidence. According to a survey conducted by the Bureau for Economic Research, consumer confidence is at a 14-year low. 

The continuing weakness of the rand, which has dropped by about 5% against the dollar since the start of the year, has not helped. The weak rand has exacerbated inflation, which hit 4.6% in May 2015. Indeed, rising inflation was one of the factors that led to weak retail sales in May, with purchases growing 2.4% y-o-y, missing expectations of 2.5%, after expanding 3.4% in April, according to Statistics South Africa. Expected hikes in energy tariffs, a bad drought and more expensive imports have also slowed household consumption.

Bright Spots 

One segment that is proving durable is luxury retail, in part a function of the improved regional environment. The African luxury goods market is still comparatively smaller than in other regions, but is growing at a faster rate. According to consultancy Bain & Co, the global luxury market was worth €217bn in 2013, with Africa accounting for just under 1%, or €1.5bn-2bn – half of which came from South Africa. Bain forecasts double-digit luxury sales growth for the continent, with strong demand for “hard” luxury items such as jewellery and cars.

In spite of the broader economic headwinds the country is facing, the rising demand for high-value purchases is being reflected in domestic sales. According to Julie Lundin, local branch head of Panerai, a premium watch brand owned by Richemont, there is growing demand among the rising upper-middle class. “South Africa has an aspirant younger generation prepared to show their success with a nice car, watches, jewellery and fashion,” Lundin told OBG.

However, high duties on some imports and the volatility of the rand can affect pricing policy, she said, resulting in price swings that contrast to the stability in other markets, like Europe. Though the top end of the retail market is somewhat insulated from the downturns in the local and international economy, Lundin said the luxury segment was feeling the impact of tougher times, with one example being a significant drop in the number of Chinese customers.

Chinese Spenders

In its 2013 “Destination Africa” publication, PwC reported that Chinese visitors to South Africa spent R15,000 ($1300) per trip, well over the R9000 ($777) average. However, Chinese tourist arrivals fell by 32.4% y-o-y in the 12 months to February 2015, a far sharper decline than the 7.2% drop in overall inbound numbers, according to a Statistics South Africa report issued in mid-June. This fall is in part due to changes in visa requirements, but is also attributable to the slowing of the Chinese economy. However, the country may be well placed to tap into high-net-worth visitors from markets closer to home, including Nigeria and Angola. Thulani Nzima, CEO of South Africa Tourism, told OBG last year, “What surprises some people when talking about African potential is that, not only is the base big, but that Africans are also proportionately big spenders.” Rens Rademeyer, general manager for Italian car maker Maserati in Johannesburg, agreed, saying South Africa had an increasing appeal for Africans from other nations, given its established infrastructure for luxury goods and vehicles. “There is a lot of money in the continent, and high-net-worth individuals either go to Europe or come to South Africa to spend,” Rademeyer told OBG.