Shoprite is considering the closure of some underperforming stores in its international markets. It currently operates almost 250 supermarkets in 14 African countries outside of its native South Africa, making it the largest grocery retail chain in sub-Saharan Africa (SSA).

During its 2019 financial year (the 12 months to June 2019), these markets, particularly Angola, weighed heavily on its overall profitably: Shoprite’s EBITDA declined by 14.3%, to ZAR6.876 billion (USD467 million) between FY2018 and FY2019 (for more details, click here). Moreover, in September 2019, Shoprite stores in Nigeria and Zambia were targeted by looters, adding to its woes.

“If we have to close a country, we will. We’ll take the decision no matter how hard it is,” CEO Pieter Engelbrecht told shareholders at the retailer’s AGM earlier this week. He added that, in the short term, the retailer was limiting capital expenditure in international markets and would “continue to focus on controlling costs in these countries.”

“Everybody is concerned about what our plans are for the rest of Africa,” chairman Christo Wiese commented, after attending meetings with various shareholders in recent weeks. He said the board was considering a number of options, including shrinking the number and size of stores or doing franchise deals. “The very last resort is to shut down a country,” he added.

The Sagaci Research View: While neither Engelbrecht nor Wiese mentioned specific countries, Angola is Shoprite’s largest international market and clearly its weakest link. Wracked by hyperinflation, the purchasing power of local consumers has plummeted, and recovery remains a distant prospect.

As a result, Shoprite will probably reduce its exposure to this market. But given that it was profitable in Angola until last year, it is unlikely to abandon it completely – at least for the moment. In the past, Shoprite has been quite ruthless in exiting difficult markets (Egypt in 2006 and Mauritius last year, for example), but with more than 30 supermarkets, leaving Angola would be a much bigger step. As a result, it is likely to be more cautious.

Shareholders alarmed by the fact that Shoprite’s share price has fallen by almost a quarter during the year to date are looking for answers. But they should bear in mind that its international operations were consistently profitable until FY2019 and that it continues to perform quite well in such markets as Ghana and has good growth prospects in Kenya (where it has opened four stores in less than 12 months).

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