Shoprite has rosy long-term growth prospects despite all
Shoprite is by far SA’s largest food retailer on whatever metric is used: market capitalisation, turnover or net profit. And it has achieved this status in a remarkably brief time, via clever acquisitions and strong organic growth.
During the past few decades, it has only had two CEOs: James Wellwood “Whitey” Basson and the incumbent, Pieter Engelbrecht. This continuity of top management has helped Shoprite to maintain a stable course through all sorts of economic cycles.
And now the group finds itself in arguably the most sustained set of negative factors that could possibly confront any retailer: pernicious loadshedding, port congestion and stubbornly high interest rates. Against this background, and coming off a high base in 2022, it is difficult to see how Shoprite will be able to maintain doubledigit earnings growth. However, the building blocks are in place for superior growth beyond the immediate horizon as new ventures, such as clothing chain Uniq, gain critical mass.
For the six months to December 31 2023, sales grew 13.9% to R121.1bn and on a likefor-like basis, sales growth was 6.5%. Gross profit rose 14.7% to R28.6bn and gross profit margin increased 10 basis points to 23.6%. Diluted headline earnings per share (HEPS) rose 7.6% to 621.4c and an interim dividend of 267c per share was declared, an increase of 7.7%.
Nielsen IQ says the group gained R4bn in SA market share in the interim period, which marks 58 months of uninterrupted market share gains in SA. Checkers is estimated to have a market share of more than 15%, while Shoprite/Usave’s market share exceeds 20%.
Shoprite has now established an extremely high presence, making incremental organic growth difficult to achieve. Its vast network of 2,300 stores countrywide has allowed it to operate as micro fulfilment centres for its Sixty60 home delivery operation. Though the group doesn’t divulge profit figures for Sixty60, management states unequivocally that the operation is “extremely” profitable.
CONTINUED FRUSTRATION
This is in stark contrast not just to the local competition but to most international home delivery operations, which rely on large central distribution warehouses for their distribution network. In this instance, smaller is better. Shoprite has a natural inbuilt advantage over the competition in this field and will continue to expand this rapidly growing element of the business.
But one area that continues to frustrate Shoprite is supplier product availability. While Shoprite aims to offer its customers 98% availability of product on its shelves, suppliers often cannot deliver more than 50% of what is required.
SA suppliers remain reluctant to invest in more private-label, or own brand, capacity. If this continues for much longer and if Shoprite cannot get a far greater penetration of private label in its product mix, it may have to consider adopting a similar vertical integration model employed by Aldi and Lidl among many other multinationals very successfully over the years: establishing and maintaining its own privatelabel manufacturing capacity.
In the area of retail data science, Shoprite is the clear leader among food retailers. Having used global consultancy Dunnhumby, a Tesco subsidiary, for its data science capability for the past decade, Shoprite recently decided it was time to bring that capability inhouse with its own operation, Retail to the Power X. Not only does this bring critical intellectual property back inhouse but it provides a platform that can be sold to other retailers to generate income.
Shoprite’s valuation, while the highest among JSE-listed food retailers at 23.9 times, at least has the benefit of sustained solid earnings and dividend growth over virtually any time frame and its share price has grown at a five-year compound annual growth rate of 8.8%.
Pick n Pay’s share price is 72% below its level of March 2019, while Spar’s is 53% below its March 2019 level. Shoprite is in a different league from any other JSE-listed food retailer.