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South Africa Debt Ensnares Stores as Consumers Struggle

Waiting for a friend at the Sandton City shopping center in Johannesburg, Abey Ngijina holds a single bag of groceries. The 55-year-old sound technician has cut his monthly food budget in half, swapping branded goods for unbranded alternatives and buying less meat.

Ngijina is among the growing ranks of South Africans who took out loans to cope with soaring grocery and utility costs, and who are now forced to trim spending on those essentials to repay the debt. These days, Ngijina devotes more than 40 percent of his 11,000 rand ($1,200) monthly salary to loan payments.

The cutbacks are unwelcome news for Shoprite Holdings Ltd. (SHP), Massmart Holdings Ltd. (MSM) and other leaders of South Africa’s $72 billion retail sector. Spending on food and clothing faces a hit this year, meaning less growth than Wal-Mart Stores Inc. (WMT) anticipated in 2011 when it plunked down $1.8 billion to buy 51 percent of Massmart.

“Households seem to be putting a brake on spending,” said Thabi Leoka, head of macro research at Standard Bank Group Ltd.

The belt-tightening isn’t always voluntary. At Shoprite, Africa’s largest food retailer, debt collectors (MLCOL) have stood near the checkout counter and demanded money from people who ask for cash back when buying groceries with plastic, according to Chief Executive Officer Whitey Basson.

The slowdown in consumer spending -- which in the final three months of last year contracted for the first time since 2009 -- will crimp retailers’ profit. Net income at Shoprite will rise more slowly this year, according to analysts surveyed by Bloomberg. Full-year profit estimates for Massmart are down about 4 percent over the past month, according to data compiled by Bloomberg.

Inflation Bites

Over the past three months, Massmart’s stock has declined 1.5 percent, while Shoprite has fallen 11 percent. That compares with a 3.1 percent gain in the FTSE/JSE Africa All Shares Index (JALSH), the country’s benchmark.

An increasingly sluggish economic environment has weighed on retail stocks. Consumer confidence has dropped to the lowest since 2008 and the 25 percent unemployment rate is the highest among the 35-plus emerging markets monitored by Bloomberg.

“There are no indications that the cost pressures on consumers will ease in the short term,” Shoprite’s Basson said at a Feb. 19 press conference.

The central bank predicts inflation will hit 5.8 percent this year. That’s been fueled by the weaker rand, which has slumped more than 16 percent over the past 12 months, the worst performer among 16 major currencies tracked by Bloomberg.

Gasoline, Vegetables

Electricity prices soared 10 percent in the 12 months ended January, according to Statistics South Africa, and gasoline prices rose 12 percent. Dairy prices jumped 10 percent, vegetables surged 12 percent, and breads and cereals climbed 7.1 percent.

Those rising costs, along with easy access to credit, fueled a 39 percent increase in unsecured loans, to 140 billion rand in the year ended Sept. 30, according to the National Credit Regulator in Johannesburg. That debt can carry annual interest rates as high as 80 percent. About one in three borrowers defaults, according to Capitec Bank Holdings Ltd. (CPI), a lender in Stellenbosch, near Cape Town.

More than 9 million South Africans now have a blemished credit record, up 8.9 percent from two years ago. President Jacob Zuma’s government has pushed for new regulations to protect consumers amid social unrest and strikes. In November, South Africa’s National Treasury and the Banking Association of South Africa said they had agreed to tighten lending rules after the number of people with bad credit records rose to a record, threatening to trap poor families in a debt spiral.

Sluggish Environment

Retailers have become ensnared in the spiral. Increases in the price of fuel and power have created a “sluggish trading environment” and will hold back consumer spending in the second half of Shoprite’s fiscal year, ending in June, the company says. Since November, Massmart says, it has seen a “marked slowdown in sales” in South Africa.

“The carry cost of debt is eating into disposable income,” Massmart Chief Executive Officer Grant Pattison said in a Feb. 28 phone interview. “We expect to see customers paying back debt” rather than taking out more loans.

As shoppers cut back, Massmart says it’s implementing more promotions that lower prices for everything from diapers to beer over a period of months, rather than the typical week or so.

Such discounts may not be enough for Busi Hlatshwayo, a 54- year-old office cleaner. To pay expenses that can exceed her income, she has taken out loans of 1,000 rand -- a fifth of her monthly salary -- that incur interest of 800 rand in just a few weeks.

“I have too many loans and the cost of transport and school fees keeps going up,” said Hlatshwayo, who says she’s buying more maize and potatoes and less meat and milk. “Food is one thing I can cut back on.”

To contact the reporter on this story: Janice Kew in Johannesburg at jkew4@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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