Shoprite to open 101 stores in SA in aggressive bid to gain market share
Shoprite CEO Whitey Basson speaks at his company’s results presentation in Johannesburg on Tuesday. Despite the downturn in economic conditions, the group intends to continue with its expansion plans for South Africa. Picture: RUSSELL ROBERTS
SHOPRITE Holdings is opening 101 new stores in South Africa before June as part of an aggressive expansion plan to gain market share in an environment in which consumers are tightening their belts.
South Africa’s largest retailer and sector bellwether reported a lower than expected 7.4% rise in first-half profit to R1.82bn on Tuesday. The performance shows the combined effects of slowing income growth and unsecured credit extension as well as the high debt burden and the rising cost of living on its core low-middle-income customer. This has intensified competition as retailers continue to vie for prime locations in a race for space and consumer’s rand.
Shoprite shares fell as much as 3.7% to R137.97, the biggest intraday decline in almost a month, according to Bloomberg.
“The average South African consumer is not in great shape. Low-income consumers spend 89% of net income to service debt, yet need 70% of income just to cover essential living expenses. It’s been a tough year, the rise in fuel and electricity costs is not helping…and GDP (gross domestic product) projections don’t show a good picture for South Africa,” CEO Whitey Basson said.
According to the group, the direct e-toll cost to date for its fleet was R4m, which will raise the price of food for Gauteng customers.
Revenue rose 9.7% to R51bn in the six months to December 31. A dividend of 132c a share was declared, 7.3% up on a year ago.
Shoprite’s South African supermarket unit, its largest division, increased turnover 7.6% to R38.275bn. Average internal food inflation for the six months was 3.8%, compared to official food inflation of 5.2%. 36One Asset Management equity analyst Daniel Isaacs, said the group’s results “were a bit light.”
“That sort of growth rate especially for SA is quite slow, the middle segment consumer is under pressure, Shoprite is putting through inflation that is lower than the inflation they’re experiencing which talks reinvesting in price points to accommodate a weak consumer and that would cause margins to squeeze a bit. These guys are in a tough space, mainly because of where the consumers is,” he said.
Shoprite closed its stores on December 15 for the funeral of former South African President Nelson Mandela, a decision which cost about R260m in sales.
Chris Gilmour, an analyst at Absa Investments said the group’s result typified what was happening at that lower-end of the market.
“People are taking predominantly more strain than their middle and upper-end peers in the market, it was a softer result than might otherwise been expected but when you are this big and when you have such a huge lead in market share, that is inevitably going to be what happens,” he said.
Despite the economic downturn, the group is maintaining its new store programme in order to reap the benefits when economic conditions improve.
“It has become a jungle out there, in which your ability to survive is being tested everyday,” the group’s deputy MD Carel Goosen said at the analyst presentation.
Over the past 12 months Shoprite has added net 104 corporate stores, more trading space compared to any of its competitors.
Absa Investments analyst Chris Gilmour said Shoprite’s market share was “comfortably above 34%”.
“They are still a clear leader, they are way, way, beyond any competitor, but you’re going to see this crazy, irrational, dysfunctional race for market share because of what’s injected into the market — predominantly by Massmart — by big, sustained discounting,” Mr Gilmour said.
“The big boys can’t afford to let a little bit of market share escape their grasp … they are clinging on to existing market share and they will throw space at it and make it a nicer shopping experience, and try to get people through the doors.We are going to have more space put into what is becoming an increasingly crowded market out there,” he said.
Pick n Pay, which is in the midst of a turnaround strategy, is aiming for 4.5% space growth. In its food business, Woolworths is looking at growth of 8% this year. In August, Massmart said it would open 90 stores over three years.
“With the exception of a few, we see across the board that guys are going very aggressive with space. We are becoming a bit of an overtraded market from a space point of view and the race for space is pretty much “keep your competitors at bay issue. Retailers don’t want to lose out because that’s what their competitors are doing …they have to go for space even though it might be cannibalising existing stores,” Mr Isaacs said.
Shoprite’s expansion will extend to Africa’s resource-rich countries such as Angola, where its five Shoprite stores sold more Red Bull than all 382 Shoprite stores in South Africa.
Despite prevalent risks such as lack of infrastructure and red tape, the group, like other retailers, is growing its footprint on the continent as urbanisation and rising affluence fuel a boom in fast-growing cities, with a middle class clamouring for high-quality branded goods.
Sales in its rest of Africa division increased by 28.1% in rand terms and 14.9% in constant currencies.
“In our non-SA portfolio, our average return on our buildings is 13.01% in dollar terms … the return on investments for the six months on an annualised basis is in excess of 45%. So now you know why we are so keen to investing in non-SA,” Mr Basson said.
Shoprite has earned its stripes as continental kingpin.
Part of its success it no doubt owes to its first -mover status — it began its expansion in 1995, and its non-South African supermarket operations now span 16 countries in Africa‚ with 163 stores. Shoprite is now partnering with South African developers to further growth in Africa.
The group will open 44 additional supermarkets in the rest of Africa by June 2015, in countries like Nigeria, Zambia and Angola. It will also extend its MediRite Pharmacy, Computicket and Money Market services to various African markets and is in the process of planning distribution centres in Angola and Nigeria.
“That’s [Africa] where the real action is…and they’ve carved out their niche. Africa is the differentiator when it comes to Shoprite…its fascinating and underlines again why they were so visionary back in the 1990s. The stakes are getting higher and they have a huge advantage because they understand it and it’s taken them so long. It’s growing nicely for them. Shareholders are happy with this. The relatively small amount of stores that they are rolling out is as hard as you can try because getting the land in the difficult…the growing rate for land is around $4m an acre. But they have a keener nose than anyone out there,” Mr Gilmour said. Shoprite has exited Tanzania after ten years in the country, selling its business to Kenya based retail group Nakumatt.
“We just couldn’t compete with the informal trade. We closed it… it’s just a waste of time for us to expand in a market where we can’t get the optimum size for having enough stores to make a meaningful contribution to us. The west coast is so much more profitable to us,” Mr Basson said.
Other markets may also be on the cards for the group.
“Europe is recovering nicely, there are some small B-grade supermarkets that could come up for sale or joint ventures; we are keeping our hands on them because we have lots of money and young talent that can run the business,” Mr Basson noted.
Despite the present weaker industry demand for durable goods, the group’s furniture division reported healthy turnover growth of 10.5%, due to the strong performance of its dominant OK Furniture chain.