SA Consumer Outlook – Unplugged

We think the retail sector and the rest of the South African economy will grapple with more frequent load-shedding in 2023. This could significantly impact the Consumer Wallet, including job losses and high price inflation as the cost of doing business rises. As the frequency and duration of outages increases, businesses could see a decline in productivity, which many, especially SMEs, may not be able to afford, leading to shorter shifts or job cuts. Where businesses mitigate the impact of load-shedding with backup power, the longer duration of running expensive alternative energy sources can devastate costs. Before 2022, consumers were disconnected from the grid for around 3.5% of the time. If the level of outages seen in late 2022 is the ‘new normal’, then consumers could be disconnected from the grid for more than 15% of the time – this five-fold increase will have a commensurate impact on diesel and maintenance costs for generators. We assess the retailers’ vulnerability to the rising cost of doing business based on their energy intensity and relative exposure to South Africa. We conclude that the food retailers SHP and PIK may be most vulnerable due to their high energy intensity and high SA exposure. Clothing retailers’ stores are less energy-intensive, and with diversification outside of SA, TFG and TRU may be relatively shielded. There is also an increased franchisee risk, as the smaller retail operators may not be able to absorb the extra costs. SPP and PIK are exposed in this area, in our view. Retailers may have to contend with changing shopping patterns (smaller baskets of cold-chain products) and may have to reallocate capex from strategic growth initiatives to backup energy projects.