After baptism of fire, new Shoprite CEO faces tough 2019
Following in the footsteps of former Shoprite CEO James Wellwood “Whitey” Basson was never going to be an easy task. But new CEO Pieter Engelbrecht has experienced nothing short of a baptism of fire since taking over in 2017.
Results for the year to end June 2018 were unexpectedly poor for a company that hitherto had a particularly strong track record, even in the tough times. The numbers largely reflect the extremely difficult economic circumstances being experienced by consumers in SA and Africa, and he had several other nasty surprises to contend with.
Group turnover, consisting mainly of Shoprite and Checkers stores in SA and Shoprite stores in the rest of Africa, grew by 3.1% to R145.3bn. The supermarket segment in SA grew by 6%, and excluding the effect of new floor space, this was only 1.9%.
Rest of Africa revenue declined by 7% and by 12% excluding new floor space. Former star performer Angola plummeted by 26.1% in rand sales. Its local currency, the kwanza, suffered a 50% devaluation against the US dollar, so no surprise that for this financial year, the economy of Angola was assessed to be hyperinflationary and reported accordingly. Despite this poor top-line performance, via relentless and remorseless cost control, the group managed to achieve a near-record gross profit margin of just under 24%. Diluted headline earnings per share came in at 968.7c, a decline of 3.8%.
The financial year was marked by several extraordinary negatives, such as the first VAT rise in 25 years, a record number of items experiencing deflation, the maiden implementation of a sugar tax, and the listeriosis outbreak at a Tiger Brands factory in Polokwane.
During the year, Shoprite experienced a 34% increase in armed robberies to 489. It’s not just the immediate effect of those shocking raids that affects business — for about three weeks after such an event the customers just don’t come back.
Although shoppers might find this difficult to believe, there were over 13,000 products on Shoprite’s shelves that were cheaper than the previous year.
Such widespread deflation affects retailers badly, as they must sell more volume merely to stand still. And the listeriosis outbreak hit Shoprite harder than many other food retailers, as it tends to be overindexed in low-end items such as polony.
The Shoprite brand tends to be synonymous with budgetconscious customers. However, in the past two years, in a cleverly calculated strategic move, the group has been promoting Checkers as a more upmarket brand. This strategy appears to be working on a few fronts.
It is investing more in fresh produce, with its growth in this category being twice that of other retailers. The group also launched 100 convenience food products during the year.
It is not clear, however, where these convenience offerings are sourced from, and Shoprite is being rather vague. There is little spare capacity in convenience food manufacture in SA and it is thus imperative to have secure and sustainable agreements in place.
Pick n Pay made a valiant effort to compete in this segment just over a decade ago but failed due to suppliers not being able to sustain their effort.
By Shoprite’s own admission, the 2019 financial year is likely to be tougher. On a price/earnings ratio of around 23 times at the current share price of around R205, it is expensive. But it’s not the priciest, with Pick n Pay around 25 and Clicks on 27 times. The share price has been in secular decline since March 2018, when it peaked at just over R275.
Notwithstanding the fact that Shoprite is probably SA’s bestrun retailer, the grim consumer outlook for the next few years makes it look expensive. Gilmour is an investment analyst.