Booming retail sales are not necessarily a bottomline boon

For food retailers, it is hard to recall the last time business was this strong. For the weeks to the end of March, Woolworths reported a near 28% jump in sales from its grocery outlets, which remain open during the nationwide lockdown, ordered 14 days ago by President Cyril Ramaphosa to suppress and contain the rapidly spreading Covid-19 pandemic.

Booming food sales at Woolworths — whose biggest division, the clothing unit, suffered declines of a similar margin during the period — give us a window into how primarily grocery merchant rivals such as Shoprite, Pick n Pay and Spar have been faring in the past few weeks.

You could say it was all just panic buying in the week before the stay-at-home order: a customer bought one tray more of eggs or an extra pack of toilet paper than they normally would have had there not been fears of coming back to the stores to find empty shelves.

But consider this: restaurant dining is banned under the lockdown and UberEats and Mr D Food are out of action, forcing millions of people to eat at home. Consumers might soon realise their stockpile of food is running low or has been depleted. So, you could safely stick your neck out and say that though demand is not near what it was in the week before the lockdown, when queues snaked into parking areas, retailers are still notching up above-average sales growth.

The JSE food retailers’ index is just more than 2% down since the beginning of March, outperforming a nearly 10% drop in the broader all share index. Still, keeping sales roaring is one thing. Doing so profitably is another.

Up to late afternoon on Wednesday, the number of people infected by the respiratory disease stood at just more than 1,740 — a more than fourfold jump from three weeks ago. Men and women showing up for their work behind grocery-store counters are in constant contact with the public, growing the risk of infection.

Some of these workers might feel fulfilled — or simply have no other choice in a country where three in 10 are without a job — by being on the front-lines of SA’s fight against the new coronavirus, but you can bet they are also terrified.

So retailers must spend some of the money they are raking in from the aboveaverage demand to ensure these unlikely heroes are protected: rolling out safeguards such as masks and sanitisers and installing acrylic glass barriers between cashiers and customers.

With the National Institute for Communicable Diseases rethinking its stance on discouraging the public from wearing masks to reduce the spread of Covid-19, the country might find itself handing out masks to low-income consumers, who would rather spend their last cent on food than on anything else.

Even with the barriers and masks, it is not unreasonable to assume that it’s not a matter of if but when some of the cashiers will get the virus. Adding paid sick leave and the costs of getting temporary stand-in employees to the income statement, you’re left with the bottomline growing much more slowly than sales.

Perhaps the biggest expense in such demanding conditions is employee salaries, which is totally understandable. So far, Shoprite has agreed to pay a R102m bonus to front-line shop-floor and distribution employees for their work during the stay-at-home order.

Woolworths’s senior rank is taking as much as a 30% pay cut in the next few months to add incentives to front-line workers and continue to pay those locked down at home, as its clothing businesses stay closed — a smart move from an investor point of view, as the salaries and bonuses to staff do not eat into the company’s profit.

No doubt what retailers, specifically Shoprite and Woolworths, are doing is laudable and some would argue they should do more. But from an equity investment point of view, above-average demand for their products over the last few weeks should not necessarily translate into bumper profits.