Consumer Industries Correspondent
THE credit binge seems to be over, with consumers turning to cash instead of credit as rate hikes start to bite.
As rising food and fuel prices put pressure on disposable incomes, consumers are finding it harder to service their debt, which will have long-term consequences for credit sales.
JD Group chairman David Sussman says the furniture retailer saw a decline in credit sales of 19% and a 10% rise in cash sales in the half-year to February as fuel, food and interest rates were still climbing.
Evan Walker, a retail analyst with RMB Asset Management, says the debt cycle will have a far-reaching effect on retail sales even when the interest rate cycle turns as heavily indebted consumers need at least three years of normal economic growth to service bad debts.
Credit sales at furniture group Lewis in the year to March, fell from 69% of sales to 67%. Chris Gilmour, an analyst with Absa Asset Management Private Clients, says Lewis’ account customers had a lower debt to household income than the national average, at about 40% instead of almost 80%.
However, food and transport costs were high, although the group’s customers were less affected by aspects such as higher mortgage costs, he says.
While credit cards will be counted as cash sales “in that kind of environment, it’s unlikely that there are a lot of credit card sales as a Lewis customer is less likely to own a credit card”, Gilmour says.
According to clothing retailer Edcon, which owns Edgars and Jet, credit sales in the year to May slowed, although total sales rose 8,9%. Sales, it says, were dampened by rising interest rates, escalating food and fuel prices and implementation of the National Credit Act.
The group, which has more than 4-million active credit card accounts, says credit sales accounted for 53% of total retail sales during the year, down from 60% in the previous financial year.
Walker says the shift to cash was caused by more people defaulting on in-store credit and fewer people opening credit accounts. The number of account customers who can spend on credit is shrinking, causing the ratio to shift to cash.
He expects about 12% of SA's total credit population to come under pressure and default on loans. It would take these people three to four years to unwind debt if their pay rises faster than food and petrol costs.
There would be fewer creditworthy customers in the system as a result of the National Credit Act's stringent criteria, which would mean less credit sales, and more cash sales, for the next few years.
Fashion retailer Foschini says it adopted a “conservative approach” to opening accounts before the full implementation of the act. The group says it “opened far fewer new accounts than other credit providers in the country”. This slowed retail turnover, but CEO Doug Murray says this was the right decision as the group’s debtors’ book was healthy in the year to March.
Gilmour says a shift to cash sales shows “the brakes are really coming on”. Consumers are paying off credit, and have learned discipline as a result of the law, which some view as having come too late to protect a burgeoning middle market.
Gilmour says new consumers, who would not previously have had access to ready credit, could have been caught in a reckless spending trap before the act’s introduction.