Johannesburg - Market growth in the food and clothing retail sector was likely to remain constrained and margins would remain under pressure, according to a survey produced jointly by CA-Ratings and Standard & Poor`s.

The authors said the intention of the survey, which was selective rather than exhaustive, was to highlight the different credit profiles of the most prominent retailers. It grouped the surveyed retailers into three broad categories according to overall operating and financial strength.

Of the firms surveyed Pepkor, Woolworths, Pick `n Pay, Shoprite and New Clicks were judged to belong in the highest category of credit quality.

Factors leading to high assessments included, on the operating side, a combination of strong diversity and critical mass, established franchise identity, and efficient management techniques.

On the financial side, such factors included low debt leverage and strong cash flows.

Foschini, Truworths and Edgars were described as having average business profiles "where the market dynamics may be more volatile" and/or where financial risks were higher.

Specialty Stores, the Retail Apparel Group and Cashbuild were described as having adequate business profiles "which may be more vulnerable to competitive forces or margin pressures",and/or where financial risks were higher than average.

The authors said that, by international standards, the local retail sector was advanced. "Despite economic and market limitations, it has shown resilience in the face of low economic growth, high interest rates, eroding per capita income, and a rising crime rate that has influenced the demise of city centre retailing."

One of the most significant limitations is the fact that, when measured against 1995 constant prices, total retail sales grew by only 0,7 percent a year since 1995.

"Under a different E scenario, the demographics of the South African marketplace, with a fast-emerging black middle class and E increased urbanisation, would provide a very positive environment for retail growth."

Major industrial credit strengths listed in the report include:

n strong diversity, size, critical mass and well-established consumer franchises;

n low-debt leverage and strong financial flexibility;

n modern and efficient store management and layout, enhanced by a commitment to the latest information technology and the benefits of database marketing;

n efficient merchandising and cost control.

The major credit risks for the sector included:

n the level of economic growth, interest rates and consumer confidence;

n margin management and inventory control in the face of intense competition and pricing pressures;

n management of international market diversification.

Referring to individual supermarket chains, the report noted that Pepkor had an above average profile.

"It is the largest mass retailer in Africa with strong market shares; well diversified in food and clothing with 25 percent of earnings derived outside South Africa from Africa, Australia and the UK."

The report noted that Pepkor`s margins were under pressure as a result of the OK acquisition and its underperforming apparel operations.

Pick `n Pay, with 38 percent of the food retail market, also had an above-average business profile. It was judged to have strong critical mass with extensively refurbished stores. An increased bias towards fresh food should support improvements in the chain`s margins.

Woolworths, which has 6 percent of the food market and 17 percent of the clothing, footwear, textiles and apparel market, also enjoys an above-average business profile.

"It has strong critical mass and healthy margins in both fresh and ready-to-eat food items; it has a strong single-brand product differentiation strategy."

Of the apparel and footwear chains, Edgars` business profile was only described as adequate. The report noted the serious loss of margin in recent years and staff management problems.

Foschini, with an average business profile, was in a strong growth phase but margins would be under pressure, with tough competition in ladies apparel.

Specialty Stores, which has just reported strong interim results, had a below average business profile.

"It has under 10 percent market share aimed at middle-to-low income groups and it has aggressive domestic store expansion plans; it maintains a focused low price-selling strategy."

In describing the financial risk of the industry, the report noted that most of the leading retailers generated significant levels of cash.

They had very strong balance sheets with minimal levels of external borrowings.

"However, a straightforward calculation of leverage using published debt figures is slightly misleading for retail companies because it can overlook one of the unique aspects of the industry - its propensity to lease its real estate."