Mr Price says discounting is not sustainable

BY Ray Mahlaka for Moneyweb
Fashion and household goods retailer Mr Price moved to allay market jitters on Tuesday, emphasising that the low-price retail model is still its differentiator despite international retailers Cotton On and H&M encroaching on its space.

After releasing a disappointing trading update last month, in which Mr Price’s retail sales grew by 1% while comparable sales declined by 2.4% for the 18 weeks to August 2016, CEO Stuart Bird said the retailer’s value offering for consumers is still intact.

Mr Price blamed the sales update on unseasonably warm weather and the aggressive promotional activity by its competitors, profiting at its expense.

The market was not impressed with the retailer’s bearish update, and heavy selling saw the share price fall by 14% since August 31, wiping off R7 billion from its market capitalisation.

Bird said since the start of winter, its competitors have been discounting merchandise aggressively, sometimes as high as “70% off the full price”.

“Over the last winter the whole retail market was on an aggressive sale mode and this affected us. We consistently applied our policy of not giving up margin and early discounts.

“We aim to constantly give our customers great value instead of marking down merchandise due to trading conditions or at the end of the season,” he told analysts.

Bird added that the level of discounting cannot be sustained among fashion retailers without permanent damage to their sales models.

“We believe that pricing activity will continue, as shoppers are becoming accustomed to discounts. There will be intense competition for their wallets, particularly so in the weak economy we find ourselves in.”

The Durban-based retailer’s apparel business weighed on its total sales – as sales in the business remained flat while comparable sales declined by 3.6%. Read more here.

It is becoming increasingly difficult for apparel retailers to squeeze out growth given the worrying state of the domestic economy and poor retail macroeconomic drivers that are dimming prospects for a revival in consumer confidence and spending.

Mr Price was often described as “defensive” because of its cash-based value model. The theory was that during tough economic times, consumers would trade down to Mr Price, putting the retailer in good stead compared to its competitors.

Its preference for cash sales over credit has also been a boon.

“As a cash retailer, we are the first to feel the economic impact but tend to recover earlier than competitors as consumers fear overextending themselves by taking more credit.”

Mr Price’s resilience has been tested, as the ongoing arrival of international fashion retailers such as Cotton On and more recently H&M have impacted the competitive retail environment.

Bird noted that their price points are higher than Mr Price’s, “they do have items that compete on price, but this is a small aspect that they offer”.

Also, their promotional activities during the winter trade period brought their merchandise prices in line with that of Mr Price’s.

“They have brought a new level of fashion that we are competing with, along with aspirational aspects for the customer. We started preparing for this well before they arrived.”

To claw back sales growth, its focus will be on the competitive pricing of merchandise and improving the customer shopping experience.

BY Ray Mahlaka for Moneyweb