Shoprite cashes in on underestimated Africa
DON’T bother looking at South Africa — Africa is where the really profitable action is, if Whitey Basson’s presentation of Shoprite’s financial results this week are anything to go by.
The reason lies mainly in an apparently insatiable appetite for big brands, a distinct shift from streetside informal traders to big shops, and a burgeoning middle class across the continent that has pricked the antennae of the likes of Walmart.
Two statistics from Basson’s presentation illustrate eloquently how investors underestimate the potential of Africa’s shoppers at their peril.
First: just five Shoprite stores in Angola sold more cans of energy drink Red Bull than in all of Shoprite’s 382 stories in South Africa.
The second equally alarming statistic is that those 19 Shoprite stores in Angola sold more bottles of the ubiquitous sparkling wine JC Le Roux than the entire South African business did.
It would be an exaggeration to say Shoprite’s business at its 163 stores north of South Africa saved its bacon in the six months to December — but that remark would not be too inaccurate.
Sales north of the border climbed 28.1% (exclude the impact of the plunging rand, and it was still 14.9%), and the return on investment for those stores exceeded 45%.
When you consider that overall, Shoprite’s first-half profit climbed only 7.4% to R1.82-billion, this shows just how muted trading was in South African shops.
Thanks to the growing African business, Shoprite’s total half-year sales topped R50billion for the first time, but there was no hiding the fact that this was still Shoprite’s slowest growth in eight years.
Of course, things weren’t helped by the fact that Shoprite lost R260-million in sales when it closed on the Sunday of Nelson Mandela’s funeral — a route that rival Pick n Pay opted not to follow.
In a light-hearted poke at Pick n Pay’s new British boss, Richard Brasher, the wily Basson quipped that his rivals would probably only close in memory of the death of World War 2 military leader Field-Marshal Bernard Montgomery.
That was, however, one of the few moments of levity at Shoprite’s results presentation.
Basson, usually full of quips and snappy anecdotes, appeared as subdued as the environment is for retailers.
Sure, the tills are ringing further north, but the core South
We will not chase market share that is not profitable
African business is struggling.
Shoprite plans to open 101 new stories in this country this year, presumably positioning itself for when the clouds lift. It is getting harder to find prime locations in an increasingly competitive market.
“We will not chase market share that is not profitable,” said Basson, pointing out that it was a race against time to secure the right shops in the right places.
Outside South Africa, Shoprite plans to open 44 new stores by the middle of next year. Its target: resource-rich nations such as Nigeria, Angola and Zambia.
As Basson will tell everyone though, it’s not plain sailing — onerous laws, poor supply-chain infrastructure and few shopping centres mean it’s a hard sell.
Already this year, Shoprite pulled out of Tanzania because it could not attain an optimum size, and was unable to take on informal traders.
For investors, it was a difficult set of results to get their heads around, reflected in the fact that Shoprite’s share price fluctuated during the week as people struggled to get to grips with how bad it really was.
This year, Shoprite’s stock has fallen 16% to R138 — but that is only marginally more than the 14% drop in Pick n Pay’s share price, 12.8% for Spar’s or Massmart’s 10.8%.
Still, after the results this week, most analysts now rate Shoprite a buy, perhaps an indication of how much value Basson is expected to ring out of Africa.
Alec Abraham, retail analyst at Afrifocus Securities, said Shoprite still had a competitive advantage in distribution, and was well-entrenched in outlying areas of South Africa.
Sales in these low-income areas is still tough, but it does mean Shoprite is well positioned, considering it will cost Pick n Pay and Massmart a lot more to open a store in these areas because of distribution costs.
But the holes in South Africa’s social fabric cost Shoprite and its rivals in other ways too.
Stores in mining areas are doing poorly, for example, while e-toll fees are set to add another R4-million to Shoprite’s annual distribution costs.
As economists warned, these fees will inevitably find their way into consumers’ dinners. Shoprite is considering making representation to the South African National Roads Agency for exemption from e-tolls.
Basson said Shoprite’s market share of the formal food market dropped marginally to 34%, even though it kept food price hikes at 3.8% — below the official food price inflation figure of 5.2%. But he believes that better days are ahead in the second half.