Expansion shake-up on cards at Shoprite
After Steinhoff merger folds, group looks set to grow outside Africa
AFTER calling off the Steinhoff merger, which would have been Africa’s biggest retail deal yet, the Shoprite group seems to have its own plans to move into other territories beyond Africa.
And it seems that separating the group into two businesses is on the cards to achieve this.
Shoprite CEO Pieter Engelbrecht said this week that the group’s long-term vision might include separating the Shoprite business into two entities to cater for the African and international operations.
“But we will need a certain size. I think at the moment Shoprite Africa on its own is too small, but that might be something that could happen in the future,” said Engelbrecht.
Shoprite has 417 stores in Africa, with its rest of Africa operations accounting for 62.5% growth in trading profit the sixmonth trading period to December. The group also announced plans this week to expand into other developing markets.
Shoprite plans to open 116 South African stores and 49 stores in the rest of Africa next year. Although Engelbrecht remained mum on the countries the group was looking at, he said: “We are looking beyond Africa into other developing countries. We’ve got quite a LONG-TERM VISION: Shoprite CEO Pieter Engelbrecht number of those.”
Engelbrecht, who took over the reins from long-standing Shoprite CEO Whitey Basson on January 1, has the mammoth task of ensuring growth for Africa’s biggest retailer.
This week, it reported a 14% rise in turnover to R71.2-billion on sales growth of 14% in the six months to December.
Operations outside South Africa grew turnover 32.3% to R12.877-billion and at constant currencies this represents growth of 51.7%.
Diluted headline earnings per share rose 15.5% to 460c. A dividend per share of 180c was declared, 15.4% more than the previous matching period’s.
Charles Allen, a senior retail analyst at Bloomberg Intelligence, GROWTH: Shoprite has 417 stores in Africa and plans to expand by opening 116 stores locally and 49 more on the continent said Shoprite had shown deep expertise in food retail and associated lines of business. It made sense to diversify this expertise geographically.
“It is less obvious that its expertise would translate into other product markets,” he said of the abandoned Steinhoff merger plan.
But Allen said it was hard to be sure Shoprite would establish a presence outside Africa.
“Food retail is generally a capital-intensive business so the potential return on capital is an important factor in deciding where to allocate the funds. It is very rare for a cross-border acquisition in food retail to generate an acceptable return on capital,” said Allen.
Few places offered the combination of population and income growth with low penetration of modern retail that Shoprite could find in Africa.
“India is occasionally mentioned — I think that Shoprite has looked at it in the past — but the rules [in India] on foreign direct investment are strict.”
Walmart, the world’s largest retailer, has 21 wholesale businesses in India.
Victor Dima, an equity analyst at Dubai-based Arqaam Capital, said that from the market attraction standpoint Shoprite would look for a market with low modern retail penetration, which could enable it to develop market share without facing the significant competition pressures it could expect locally.
“The markets of East Asia and Southeast Asia still have low penetration of modern retail formats and share of modern retail will grow in these markets,” he said.
Looking at Shoprite’s African operations, Dima said it was poised for better growth than its peers. Its exposure in these markets, particularly when it came to space growth, would continue to support Shoprite growth above its key peers.
In many ways, Shoprite still had a small market share in its Nigerian market, and had confidence that growth would be maintained.
In the period, Shoprite reported that sales growth in Angola was 155.4%, boosted by a 46.2% rise in like-for-like customer growth.
In Nigeria, the group reported 60.1% sales growth and a 10.6% increase in same-store customer growth.
“The pricing in these cities were quite different . . . [the growth] in Angola came because we had products on shelf that nobody else had,” said Engelbrecht.
But with South African consumers, sales growth was up 10.7% to R50.9-billion. The group had 31.7% market share at present, he said.
Soria Hay, head of corporate finance at Bravura, said she still thought there was strong growth opportunity for Shoprite in Africa.
“I personally don’t like the separation. For example, Pep is run by one management team with integrated logistics and distribution networks.
“I don’t think it is optimal to split-manage teams in order to split onshore and offshore,” said Hay.