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How SA’s supermarket chains are adapting to difficult conditions

| Economic factors

As debt-laden shoppers tighten their belts, retailers are left with fewer and fewer options

Should you find yourself in a long queue at a supermarket with only a handful of open till points — get used to it. It’s likely that the supermarket will not open more checkout points, and queues are here to stay.

In their quest to cuts costs and manage overheads, SA’s supermarket chains are getting more rigorous with staff scheduling; they are employing the same number of people over a longer workday by splitting staff into morning and evening shifts.

Sasfin senior equity analyst Alec Abraham says supermarkets have few options left in this steep economic downturn. Retailers are also buying the buildings their stores are in, he says, which protects them against costly spikes in rent.

A rise in interest and VAT rates, along with a jump in the fuel price and below-inflation wage increases, has put retailers and their shoppers under huge pressure.

Debt is another issue consumers have to contend with. The ratio of household debt to disposable income stands at 71.3%, according to the SA Reserve Bank’s Quarterly Bulletin for December 2018.

The bank said there was a decrease in the net wealth of households, as a result of "an increase in liabilities outpacing that in nonfinancial and financial assets".

In other words, the amount of debt people are carrying is making them poorer.

This is bad news for retailers. The difficult conditions are reflected in the trading updates from players such as big-box chain Massmart and SA’s largest retailer, Shoprite.

Shoprite said trading conditions were so bad that for the first time back-to-school essentials outperformed toy sales over the festive season.

It was a similar story at the Walmart-owned Massmart, where sales were up only 2.9% to R90.9bn for the 52 weeks to end-December.

Abraham says that judged on like-for-like sales, the group actually sold fewer goods.

For a low-margin/high-volume retailer, this is especially troubling.

Shoprite’s sales increased just 0.03% to R72.9bn for the six months to end-December.

@Small Talk Daily Research analyst Anthony Clark says the Shoprite numbers show just how much stress consumers are under — they are starting to cut back on essentials.

But even with consumers under severe strain, retailers have somehow managed to maintain their market valuations.

"Why does Clicks still have a p:e of 32, Dis-Chem is at 20, Shoprite is at 18.66 and Spar is at 20.88? I just believe that our retailers are too expensive," says Gryphon research analyst and portfolio manager Casparus Treurnicht.

Treurnicht has a point. Even Pepkor, whose share price slid from R25.40 to a low of R15.11 when the accounting fraud at parent company Steinhoff came to light, has a lofty valuation.

Despite the difficulty in the sector and the troubles at Steinhoff, its share price has since risen to around R20, giving it a p:e of 23.53.

Clark says there are historical reasons for the high valuations. "SA is a nation of spenders." This can be seen in about 60% of the country’s GDP being generated by consumption.

Over the years, this has boosted the valuation of retailers, as they were seen as "a consistent and defensive sector", he says.

Even so, he thinks this could soon change, as the market is waiting until after the elections to figure out where the country is headed.

Though valuations remain high, there has been a fresh sell-off in retail shares. When Mr Price and Woolworths reported disappointing sales over the festive season two weeks ago, it sparked a 7.6% single-day drop on the JSE’s general retail index.

Clark says there could be another steep drop, depending on what’s revealed when the retailers start releasing their results over the next few months. Their recent trading updates gave a limited indication of their performance, but once detailed results are published, it could lead to a sell-off if earnings are at the lower end of projections.

If this happens, valuations in the sector will fall. "There will be a bloodbath," says Clark.


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