Consumer sentiment in Turkey is weakening as the pace of economic growth slows and consumers tighten their purse strings, potentially slowing the retail sector?s stellar performance in recent years.
Turkish retail has been one of the most appealing sectors for both investors and consumers thanks to a rapidly-expanding economy and a surge in per capita disposable income in the past five years.
On the basis of household expenditure, total retail turnover for 2013 was around $285bn ? up from $171bn in 2010 according to the Turkish Council of Shopping Centres and Retailers (AMPD). Of this, around $100bn, or 35%, was in modern retailing ? the shopping centres and retail parks whose operators are usually members of the AMPD. This was up from some $75bn in 2010, with the Council predicting a total retail market of about $400bn plus by 2023 ? the centennial of the founding of the Turkish Republic and a target date for many government development plans.
However, consumer sentiment has been in decline since April when the TurkStat confidence index dropped to 78.5 points, well short of the 100 that indicates an optimistic outlook. The results of the October survey showed the index had slid to 70.3, which is 3.7 points or 4.9% down on the previous month and the second lowest point in 22 months.
The general economic expectations index fell 10.5% from September?s positive 102.1 points to 91.3 points. Respondents believe unemployment is set to rise ? with the jobless rate hitting double digits in August ? while consumers will be more inclined to save than spend in the coming months.
Slowing growth
Borrowing trends also indicate a slackening consumer activity. Data from the Banking Regulation and Supervision Agency (BDDK) showed an 8.1% increase in household debt in the 12 months to September. However, with the impact of inflation included ? running at 8.9% year-on-year as of the end of October ? debt stock has eased in real value terms.
This suggests that Turkish consumers have been taking a more cautious approach to spending. A steep jump in interest rates imposed in January, and tighter credit measures put in place by the authorities, including limiting repayment terms on a range of credit card purchases, have reduced the appetite for borrowing.
Demand may remain muted for some time to come. Inflation remains well above the central bank?s target of 5%, due to high food and fuel costs. As such, the likelihood of interest rates being cut to any great degree in the short-term are minimal, despite government pressure to lower rates to boost growth before a general election next year.
“The details of the data signal that high levels in annual inflation could continue in the coming months,” said HSBC strategist Ali Cakiroglu in a research note.
A report issued in November by ratings agency Moody?s echoes this sentiment, noting that the Turkish economy is likely to come under increased pressure, with external vulnerabilities weighing on the credit profile of the government as well as those of its banks and corporates. Turkish companies will be hit by slower growth while a reduction of capital inflows may diminish their access to funding, as inflation and geopolitical risks dampen consumer and investor sentiment.
Over the past four years Turkey’s economic growth had been driven by externally financed domestic demand. With borrowing costs set to climb due to factors such as the end of the US Fed?s bond buying programme ? which will see capital flow back to the US economy ? further steam will be taken out of Turkish spending, impacting the retail sector.
Retail?s stars realigning
Though data appears muted for the consumer outlook, the retail sector itself is less cautious in its outlook. According Turkstat, sentiment amongst retailers is well above that of its clients, rising 0.1% to 103.9 points on the seasonally adjusted scale.
Results for the retail industry are in marked contrast with those for other key sectors, with construction and service sector both slipping further into negative territory below 100.
And there is some cause for optimism. Estimates from Deloitte show that the sector is earmarked for a compound annual growth rate (CAGR) of 7% between 2014 and 2018 after the number of shopping malls has more than quadrupled in the past decade, topping 330 by the end of 2013 in over 54 cities.
Yet with 2013 seeing a number of big internationals either pulling out or downsizing their participations, the market clearly also poses some challenges. Last year, European retailer Carrefour reduced its holding in its Turkish operation to 46.2%, selling 12% of its shares to partner Sabanc? Holding for ?60m, giving the local conglomerate control of the chain, which has more than 200 outlets.
In October, Turkish mixed activities corporation, the Anadolu Group, announced it had made an offer to UK-based equity group BC Partners for a 40.25% stake in supermarket chain Migros, which has some 1000 outlets nationwide. Currently BC Partners has around an 80% holding in Migros, having gained control of the chain in 2008, but has been seeking a buyer for some years.
Analysts point to a fragmented market, which is dominated by thriving local businesses, while global supermarket chains find it difficult to differentiate themselves from local players. British supermarket chain Tesco, which trades under the name Kipa, is reportedly looking at lowering its profile, including closing a number of loss-making outlets and diluting its stake in its Turkish subsidiary while it focuses on its UK business.
