In the age of digital shopping, online retailers like Temu and Shein have become household names, attracting millions with their low prices. However, this surge in e-commerce has significant impacts on local retailers, who often struggle to compete with the pricing of these online giants. Local retailers and stakeholders in the textile industry have raised concerns about these companies exploiting a tax loophole to keep their import prices low. The potential consequences of this spread much further than lost sales for local retailers.
Local retailers are subject to a 45% import duty and 15% VAT on imported goods. However, the so-called de minimis rule allows companies like Shein and Temu to bring in clothing parcels valued under R500 with a reduced 20% import duty and a 0% VAT rate. This disparity places local retailers at a significant disadvantage, struggling to compete with the lower-priced direct-from-China imports. Consumers, naturally inclined to seek the best deals, often choose these cheaper imported goods over local store offerings, even when price differences are minimal. This preference is driven by the challenging economic environment in South Africa, where high interest rates and debt servicing costs, coupled with persistent inflation, have significantly constrained disposable income. Elevated borrowing costs reduce consumer spending power, while inflation further erodes disposable income, making consumers more price-sensitive and decreasing their overall spending on non-essential items like fashion.
To remain competitive, local stores are often forced to reduce prices, a strategy that inevitably eats into profit margins. For many local retailers, cutting prices to compete with the likes of Shein and Temu is a double-edged sword. On one hand, it is essential to stay relevant in a market where consumers are increasingly price-sensitive and driven by the lure of cheaper online options. On the other hand, the reduction in prices means that these businesses earn less profit, which can have several detrimental effects. Firstly, sustained low pricing can lead to a diminished value perception among consumers. When retailers consistently lower their prices, customers may come to expect these reduced prices as the norm, making it challenging to return to regular pricing even when market conditions stabilise. This expectation can erode brand value and lead to a race-to-the-bottom scenario, where only the lowest price matters, often at the expense of quality and service. Secondly, lower profit margins reduce the financial resilience of local retailers. With thinner margins, they have less buffer to absorb unexpected costs such as supply chain disruptions, economic downturns, or increases in operational expenses. The ripple effects of diminished profitability extend beyond individual businesses to the broader local economy. Local retailers contribute significantly to their communities through job creation, local spending, and participation in community events and charities. As their profit margins shrink, so does their ability to contribute positively to the local economy and society.
While online retailers like Shein and Temu have disrupted the market with their low prices and vast product selections, local South African retailers hold several competitive advantages. Local retailers offer immediate product availability, allowing customers to see, touch, and try items before purchasing. For example, a shopper can visit a local store to try on a shirt, pair of pants, or shoes and make an instant decision, thereby avoiding shipment delays and potential return hassles. Additionally, local retailers generally provide faster delivery times compared to Shein and Temu, where delivery can take up to two weeks. Local retailers also offer straightforward and immediate return or exchange processes, as opposed to the often cumbersome procedures of global online retailers. Moreover, local retailers frequently source from trusted suppliers, offering better quality assurance. As a result, local clothing stores often provide garments made from higher-quality fabrics, ensuring greater durability and comfort compared to mass-produced items. Furthermore, local South African retailers understand and cater to regional tastes, cultural nuances, and seasonal preferences, allowing them to stock products that better match the needs and desires of their community.
Starting 1 July 2024, the South African Revenue Service (SARS) will enforce stricter regulations on all clothing imports. SARS will eliminate the small parcel exception for imported clothing items, subjecting goods valued under R500 from companies like Shein and Temu to the standard import taxes. This change is not intended as a penalty but rather as a measure to ensure fair tax application. While it does increase costs for consumers, the aim is to establish uniformity by taxing individual orders at the same rate as wholesale imports. By closing this loophole, the new rule seeks to level the playing field, ensuring that all market participants, regardless of their origin, comply with the same tax obligations.
The following example illustrates the practical implications of eliminating the small parcel exception for imported clothing items:
Over the past few years, local South African retailers have faced significant headwinds due to various supply chain disruptions, severely impacting their operations and profitability. These disruptions range from global shipping bottlenecks to local infrastructure challenges. In 2023, the Port of Durban, South Africa’s busiest port, suffered severe congestion, caused by a surge in shipping volumes post-pandemic and inefficiencies in port operations. This resulted in delayed ships and a backlog that hindered the timely delivery of goods. Additionally, the cost of shipping goods to South Africa soared dramatically during 2022-2023 due to rising fuel prices, placing extra pressure on retailers dependent on imports. Eskom’s frequent loadshedding further complicated matters by disrupting retail operations and supply chain logistics, making it challenging for warehouses and suppliers to maintain consistent operations and meet delivery schedules. Poor road and railway infrastructure have compounded these issues, causing significant delays and disruptions in freight transport.
However, the outlook for the industry is expected to gradually improve in 2024 due to several positive developments. Price pressures are anticipated to moderate, and the frequency of loadshedding is projected to decrease compared to 2023. Additionally, with inflation stabilising and the potential for the South African Reserve Bank (SARB) to adopt a more accommodative monetary policy later in the year, economic conditions should become more favourable for retailers. The recent outcome of the South African election also adds a layer of optimism by potentially reducing political uncertainty, which has been a persistent concern for both investors and businesses.