Margins and money

Everybody has to eat, so it’s not altogether surprising that the big listed food retailers are doing well despite the ailing economy.

And while inflation gnaws away at food manufacturers (not to mention consumers), food retailers can maintain earnings by managing rising costs with razor-sharp efficiency. If they hold onto their margins they could even make more money, says Jean Pierre Verster, portfolio manager at Fairtree Capital. “They’re in a position to pass on the increases. If they can hold onto their gross profit margins as a percentage of selling price and maintain volumes, inflation can be positive.” But they’re also being hit by soaring electricity costs, rentals and rates and taxes, he adds.

SA’s big food retailers run a tight ship. They operate in a relatively mature market for an emerging economy and increasingly use different formats: selling through the Internet, petrol station forecourts, specialised pharmacy and alcohol stores across different brands, and in bigger and smaller stores.

They battle not only each other but retailers who have traditionally operated in other spheres. Massmart has moved aggressively into food through Game and Cambridge Food. Pharmacies Clicks and Dis-Chem also sell food, electronic goods and detergents.

It’s a competitive space. While official food inflation is 5.3%, Pick n Pay’s internal inflation in its latest reporting period was 3.1%, Spar’s 4.5% and Shoprite’s 2.2%.

“If you can manage margins and control costs, you can maintain and grow profitability,” says Syd Vianello, an independent retail analyst. “Ultimately, higher inflation does lead to a drop-off in volume. However, the offset is always positive for the retailer . . . in a scenario of rising inflation, the food retailers will generate more turnover even with lower volume growth.”

Woolworths has been the star retail performer in recent years. Before that it was Shoprite Holdings, which usurped Pick n Pay’s top spot as the biggest retailer and which introduced centralised distribution and financial and other services earlier than its peers. Shoprite continues to hold best-inclass margins, but Pick n Pay is starting to erode its lead as it widens margins, albeit off a low base. “Up till now Pick n Pay was making money out of cost savings; now they’re bringing costs down and benefiting the bottom line,” says Vianello.

But he does not think Pick n Pay can achieve Shoprite’s level of margins because of its franchise component.

leader of the pack in terms of market value, revenue and margins. Its market cap is R94bn, Woolworths’ R90bn (with half the turnover), Spar’s R37.6bn and Pick n Pay’s R35.5bn.

Shoprite is supported by its well-established centralised distribution network, strong brand and presence in several channels from hypermarkets to home furnishings. The group’s market share was 19.4% in 2015, according to Euromonitor, but 31.2% of the formal sector market, according to Nielsen. It is perceived as a low-price retailer and benefits from consumers driven