DISCRETIONARY SPENDING. How Has Spending Changed? RETAIL SNAPSHOT Q3:2017. Visit broll.com or for more information

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1 DISCRETIONARY SPENDING How Has Spending Changed? RETAIL SNAPSHOT Q3:2017 Visit broll.com or for more information

2 How Has Spending Changed? Consumers across South Africa (SA) have been indicated as being under financial strain over recent years primarily attributed to aspects such as increased living costs, high household debt to disposable income, interest rates and inflation. Additionally, the Consumer Confidence Index, which indicates consumer s outlook in terms of the country s economic position, personal finances and spending power, remained negative (-10) in the fourth quarter of Thereafter, a slight improvement (-5) was evident in the first quarter of 2017, however, this declined to -9 in the second quarter emphasising consumer s continual negative outlook. These aforementioned factors affect consumer s ability to spend which in turn affects retailer s turnover figures, average monthly trading densities (TD) and thus the retail market as a whole. Factors Affecting a Consumer s Ability to Spend Electricity Prices Electricity prices are constantly increasing with no declines in the foreseeable future. Eskom made an application to the National Energy Regulator of South Africa (NERSA), in the form of Multi-Year Price Determination (MYPD3), with regards to approval for a proposed electricity price structure. This application spans over a 5 year period from the 1st April 2013 to the 31st March 2018, whereby NERSA approved an average tariff increase of 8% per annum. The 8% increase was implemented in 2013/2014 as well as in 2014/2015, however early 2015 a tariff adjustment was made which increased the tariff by 12.69% instead of 8% and for 2016/2017 an increase of 9.4% was implemented as a result of further applications made by Eskom. Most recently, NERSA approved a 2.2% tariff increase for 2017/2018 which was implemented as at 1 April 2017 for Eskom direct customers and 1 July for municipalities. Fuel Prices Bloomberg s Global Petrol Price Index indicates that SA ranked 20th out of 61 countries worldwide with regards to the price of petrol thus quite affordable on a global comparison level, i.e. the average price of a litre of petrol in SA was R13.29 as at the second quarter of 2017 whereas in Hong Kong (ranked 61st) a price of R24.35/litre was evident. However, SA is one of the most expensive places in the world for consumers to keep their petrol tanks full, ranking 60th with regards to income spent on petrol which equated to roughly 3.2% of the average annual salary, Mexico ranked 61st at 3.6%. Additionally, when looking at affordability SA ranked 56th, with roughly 5.6% of a day s wage being required to afford a litre of petrol, based on an average daily income of R224. Whereas in a country such as India, which ranked 61st, roughly 19.3% of a day s wage is needed to afford a litre of petrol, based on a daily income of R70. From January 2012 up until August 2017 fluctuations in 93 unleaded petrol (UPL) and diesel prices have been noted, primarily attributed to local currency exchanges and the global oil price. On average, over this almost 6 year period, in Gauteng the overall month-on-month price increase equates to 0.4% for 93 ULP and 0.2% for diesel, whilst on a year-on-year (y-o-y) basis 93 ULP recorded a 3% price increase while diesel experienced an increase of 2%. Increased fuel prices do not only affect the consumer in a direct manner but also indirectly, as the price of goods are impacted upon due to transportation costs thus these increased costs are then passed on to the consumer by means of higher product prices.

3 Gauteng Fuel Prices Cents/Litre Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul ULP Diesel Source: SAPIA Inflation and Interest Rates Y-o-y inflation for July 2017 was recorded at 4.6% which is a decline from 5.1% recorded in June 2017 and 6.0% in July The largest contributors to the 4.6% increase were miscellaneous goods and services (1.2%), food and non-alcoholic beverages as well as housing and utilities, each contributing 1.1%. In Q4:2015 the interest rate experienced an increasing trend recording 9.50% in October and 9.75% in both November and December. This increase continued into 2016 whereby January recorded 10.25% and February recorded 10.50%. However, thereafter the interest rate remained stable throughout 2016 and into 2017, and declined to 10.25% in July From January 2012 to July 2017 the average y-o-y inflation rate was 5.7%, whereas the average interest rate was 9.38%. Inflation vs Interest Rate 12% 10% 8% 6% 4% 2% Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 CPI Interest Source: Stats SA and SARB

4 Discretionary Spending According to Business Dictionary, discretionary spending is money spent by consumers on non-essential purchases such as luxury items whereas Cambridge Dictionary further explains that discretionary spending is money spent by consumers on things other than necessary things such as food, clothes and fuel. Investopedia elaborates that because discretionary income is the first to shrink amid a job loss or pay reduction, businesses that sell discretionary goods tend to suffer the most during economic downturns and recessions. Thus when looking at certain retail categories within the South African retail market over the last five years, with a one year period being from August to July, does this statement hold true? Have retailers who sell mostly discretionary goods been struggling more so in comparison to those selling necessities? How has spending changed? A retailer s turnover figures are determined by the monthly sales made to customers, thereafter average monthly TD over a yearly period can be calculated, thus essentially reflecting customer spending per m². While nominal values do not take inflation into account, real values are adjusted for inflation. For the below two sections, i.e. nominal values and real values, accessories, jewellery and watches, beauty 1 as well as homeware and furniture 2 have been viewed as retail categories selling discretionary items whereas apparel 3 and grocery/supermarket sell necessity items. Nominal Values In nominal values the highest average monthly trading density, over a five year period, was evident for retailers in accessories, jewellery and watches which recorded R4,089/m² which can be attributed to the smaller sized stores of such tenants. Whereas grocery/supermarket retailers came in second highest at R3,404/m² likely attributable to their necessity item offering, followed by beauty and apparel retailers, R2,072/m² and R2,003/m² respectively with the lowest amount being evident for retailers in homeware and furniture, i.e. R1,620/m². Beauty retailers were the only retailers that experienced an overall average y-o-y decline in trading density growth over the last five years, i.e. an average of -0.2%, whilst 0.1% growth was evident for homeware and furniture, 2.0% for apparel, 2.4% for accessories, jewellery and watches, with the highest growth being evident for grocery/supermarket retailers, i.e. 3.2%. Indicative of more spending taking place with regards to necessity products such as groceries and less spending on discretionary items such as cosmetics, perfumery, beauty salons and hairdressers. 1 Beauty: Cosmetics and perfumery, beauty salon, hairdressers. 2 Homeware and Furniture: Homeware and interior, furniture focus. 3 Apparel: Men s wear, women s wear, children s wear, unisex wear, lingerie and swimwear, shoes.

5 Year-on-Year TD Growth (Nominal Values) Y-o-Y Growth (%) 10% 8% 6% 4% 2% 0% -2% -4% -6% Aug 13 - July 14 Aug 14 - July 15 Aug 15 - July 16 Aug 16 - July 17 Accessories, Jewellery and Watches Apparel Beauty Grocery / Supermarket Homeware and Furniture Source: Broll Research Real Values When looking at real values accessories, jewellery and watches, beauty, homeware and furniture, apparel and grocery/ supermarket retailers all experienced a decline in average y-o-y trading density growth over a five year period although in varying degrees, showcasing that less spending is in fact evident across the board. The smallest decline of 2.3% was recorded for grocery/supermarket retailers, indicative of the need products which these retailers offer. Whilst the largest declines of 5.6% and 5.2% were recorded for retailers in beauty as well as homeware and furniture respectively, indicative that luxury/want purchases have declined by a larger extent which can be attributed to consumers being under financial pressures thus more spending consideration is taking place. With regards to average monthly TD over a five year period, retailers in accessories, jewellery and watches recorded R4,567/m², followed by grocery/supermarket retailers at R3,800/m², beauty retailers R2,320/m², apparel retailers R2,237/m² and retailers in homeware and furniture R1,814/m². Year-on-Year TD Growth (Real Values) 4% 2% 0% Y-o-Y Growth (%) -2% -4% -6% -8% -10% -12% Aug 13 - July 14 Aug 14 - July 15 Aug 15 - July 16 Aug 16 - July 17 Accessories, Jewellery and Watches Apparel Beauty Grocery / Supermarket Homeware and Furniture Source: Broll Research

6 Concluding Remarks A decline in spending has been evident over the last five years, in real terms, across retailers selling discretionary items as well as those selling necessity items. However, grocery/ supermarket retailers have experienced a lesser decline in growth which can be attributed to the necessity items which these retailers offer. Reduced discretionary spending has been taking place with the likes of beauty retailers and those in homeware and furniture recording the largest declines in growth. Consumers have become more aware when it comes to spending and aspects such as increasing electricity prices, high fuel costs, inflation and interest rates which affect the amount of disposable income available, continue to place increased financial pressure on consumers and this is not expected to improve in the near future. For more information please Broll Research research@broll.com Disclaimer Broll Property Group has taken every care in the preparation of this report. The sources of information used are believed to be accurate and reliable, but no guarantee of accuracy or completeness can be given. Neither Broll Property Group, nor any CBRE company, nor any director, representative or employee of Broll Property Group, accepts liability for any direct or consequential loss arising from the use of this document or its content. The information and opinions contained in this report are subject to change without notice. No part or parts of this report may be stored in a retrieval system or reproduced or transmitted in any form or by any means, electronic, mechanical, reprographic, recording or otherwise, now known or to be devised, without prior consent from Broll Property Group.