The impressive Shoprite story ... or is it?
Shoprite is an outstandingly successful SA business, as its results for the six months to December confirm. It has grown rand revenues and volumes by taking an increased share of the retail market. The return on the capital invested in the business remains impressively high. Post-Covid returns on capital invested have encouragingly picked up again.
If R100 were invested in Shoprite shares in 2015, with dividends reinvested, it would have grown to R231 by March 2024. Earnings per share have grown 55% since January 2015. The same R100 invested in the JSE all share index would have grown to R198 over the same period, though Shoprite bottom earnings per share seemed to have hit something of a recent plateau: load-shedding and the associated costs of keeping the lights on have raised costs.
However, earnings and returns for shareholders in rand of the day that consistently lose purchasing power need an adjustment for inflation. The performance of Shoprite in real deflated rand, or in dollars, has not been nearly as imposing.
Recent earnings when deflated by the consumer price index or converted into dollars are still marginally below the level of January 2015 and well below real or dollar earnings, which peaked in 2017.
The average annual returns for a dollar investor in Shoprite since 2015 would have been about 6%, compared with 10.6% on average for the rand investor. Shoprite earnings in dollars are 6% below their levels of 2015.
The Shoprite returns realised for shareholders compare closely with those of the all share index but have lagged well behind the rand returns realised on the S&P 500 index. Even a great SA business has not rewarded investors very well when compared with returns realised in New York. It would have taken a great business encouraged by a growing economy to have done so.
The depressingly slow growth rates realised and expected are implicit in very undemanding valuations of SA economy-facing enterprises. The investment case for Shoprite and every SA economy-facing business, at current valuations, would have to be made on the possibility of SA GDP growth rates surprising on the upside.
It will take structural supplyside reform to surprise on the upside, of the kind offered by the Treasury in its 2024 budget. It makes the case for less government spending and a reduced tax burden to raise SA’s growth potential. It makes the right noises and calls for publicprivate partnerships and “crowding in private capital ” .
However, help for the economy would come all the sooner in the form of lower interest rates, a stronger rand outlook and less inflation, were these proposals regarded as credible. With more growth, expected fiscal sustainability would become far more likely. Long-term interest rates would decline as the appetite for SA debt improved. And lower discount rates attached to SA earnings would command more market value.
Lower long-term interest rates (after inflation) would reduce the high real cost of capital that SA businesses now face. Without expected growth in the demand for their goods and services, businesses will not invest in additional plant or people. The lack of business capex severely undermines the growth potential of the SA economy over the long term. A supply-side problem is not the only wall SA faces. The economy also suffers from a lack of demand for goods and services. Demand leads supply as much as supply constrains incomes and demand for goods and services. The case for significantly lower short-term interest rates to immediately stimulate more spending by households seems incontestable — outside the Reserve Bank, perhaps.