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Clear winner in South African retail battle

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By: Bianke Neethling – Daily Investor

This is the view of Sasfin analyst Alec Abraham, who told Daily Investor that the key headwind for food retailers in South Africa is the economic malaise degrading consumer wealth.

Over the past few years, rising living costs have significantly impacted South African households’ wallets. Consumers struggle to afford basic necessities, and most do not have a retirement plan.

FinMark Trust’s annual FinScope Consumer South Africa for 2023 found that food costs consume approximately one-third of South African residents’ income, and rising costs weigh heavily on consumers’ budgets. 

Living expenses, which include groceries, energy, transportation and communication, account for around 85% of monthly income. 

Specifically, groceries account for 30.4% of expenses, energy for 11.5%, transportation for 9.1%, communication for 8.8%, and routine household maintenance, rental, and rates for 8.5%.

“These rising costs affect not only the ability to invest in education and insurance but also contribute to the inability to repay debt,” the survey found.

In this tough economic environment, Shoprite has emerged as the clear winner among South Africa’s listed food retailers, including Pick n Pay, SPAR and Woolworths.

Abraham said Shoprite has been the winner for four key reasons –

  • The retailer sharpened its strategic focus on South Africa and stepped away from the much more complex, risk-laden, for minimal financial reward, African expansion. 
  • It effectively leveraged its perceived price leadership position to gain market share.
  • It leveraged its leadership to expand into other retail categories to capture growth in the low-growth South African economy and weak consumer landscape.
  • All these factors also enabled the group’s early investment in an efficient distribution system.

“With such a commanding lead, it’s difficult to imagine that any other retailer could challenge,” Abraham said.

This means Shoprite will likely remain at the top for at least the next three to five years. 

Compared to Shoprite, the other South African food retailers are performing poorly and are being held back by strategic missteps.

Abraham said Pick n Pay and SPAR, in particular, have self-inflected problems to overcome, which revolve around slow reactions to changing environmental dynamics.

However, Woolworths Food will remain a strong player, with clear leadership in in-store shopping experience, product quality, and multi-year success in shifting its perceived value proposition.

Below is an overview of South Africa’s top four listed food retailers and their performance over the past decade.

Shoprite

BDO South Africa Consumer Business Partner Faheem Hoosen said Shoprite’s decision to consolidate its business around its South African core and embrace technology and innovation has driven its impressive growth in recent years. 

Shoprite owns top brands, including Checkers, House & Home, OK, Uniq and Computicket. 

The retailer has shown remarkable growth across all of its major retail store chains and has consistently delivered double-digit sales growth.

Another key factor to this success is the company’s seamless integration of digital channels and advanced technology, which enables it to maintain its competitive advantage. 

Hoosen explained that Shoprite has leveraged technology to enhance customer experience and stay ahead of the competition, from the development of an AI-powered pricing tool to Checkers Sixty60’s on-demand delivery service. 

Shoprite’s strategic approach to store expansion also demonstrates a vital understanding of local demographics and community needs

In its latest results, Shoprite reported making R219.53 billion in revenue and an operating profit of R12.34 billion.

Pick n Pay

In October 2023, Pick n Pay announced that it replaced former CEO Pieter Boone with Sean Summers, who was Pick n Pay’s CEO between 1999 and 2007.

To understand this drastic action, one must consider Pick n Pay’s performance under Summers and Boone.

Summers is a Pick n Pay stalwart who worked for the company from 1974 to 2007. He became managing director in 1996 and CEO in 1999.

During his tenure as CEO, Summers made Pick n Pay the clear grocery market leader in South Africa.

During Summers’ tenure as CEO, he achieved an average annual revenue growth rate of 16% annually.

Pick n Pay’s growth rate was significantly higher than Shoprite’s average annual revenue growth rate of 11% over the same period.

Pick n Pay also generated more revenue than Shoprite during this period, passing Shoprite’s revenue from 2003 to 2007.

Under Boone, Pick n Pay achieved an average annual revenue growth rate of 6.1%. Over the same period, Shoprite achieved an average annual revenue growth rate of 11.5%.

Pick n Pay’s earnings also suffered under Boone and did not keep up with its main competitor.

Boone achieved an average annual net income growth rate of 0.95% compared to the average net income growth rate at Shoprite of 22% over the same period.

Like-for-like revenue only grew by 3%, much lower than inflation, and trading profit fell 87% from R3.05 billion to R385 million.

Its net profit was significantly impacted by a R2.4 billion interest expense due to rising debt and a R2.8 billion impairment loss on assets.

SPAR

While SPAR has shown revenue growth over the past decade, the retailer’s earnings haven’t kept pace.

This is largely due to increased competition in the food retail space and the country’s economic hardships.  

However, SPAR’s weak performance over recent years has also largely been due to self-inflicted challenges.

For example, SPAR’s SAP implementation challenges at its KwaZulu-Natal distribution centre and the impairment of goodwill and intangible assets associated with SPAR Poland have significantly impacted the retailer’s profitability in recent years. 

SPAR started rolling out the new R1.8 billion SAP software system at its KwaZulu-Natal distribution centre earlier this year.

However, this transition resulted in “various go-live and integration challenges”, negatively impacting the company’s distribution operations in the region, the company said.

The move to SAP software resulted in various integration and distribution issues, which caused interruptions in stock deliveries to stores and lost sales.

Estimates suggest this botched implementation led to a loss of R1.6 billion in group turnover and R720 million in profit for the region.

The retailer’s latest full-year results showed a significant drop in earnings and profit for the 2023 financial year, pushing the retailer to declare no dividend for the year.

The retailer delivered turnover growth of 10.1%, increasing turnover to R149.3 billion. 

However, it reported an operating profit of R1.8 billion in 2023 – a 47% decrease from the R3.4 billion reported in 2022. 

SPAR’s earnings for the period also declined significantly in 2023. Headline earnings per share fell by 47.7% to 606.6 cents per share, while earnings per share dropped by 81.3% to 208.6 cents.

Woolworths

Woolworths is set apart from other South African food retailers in that it targets the higher-income market. It also derives a large segment of its income from items other than food, including clothing and household products.

This has made it one of the more resilient retailers in South Africa, but some strategic mistakes in recent years have been costly for the company.

In particular, Woolworths’ 2014 acquisition of David Jones has cost the retailer billions. The retailer hoped to expand its business internationally and become a leading apparel retailer, but this plan turned out disastrous.

Woolworths invested heavily in David Jones, both for the initial purchase and for improvements over the years. This totalled at least R28.6 billion. 

However, David Jones never performed as expected. It generated far less profit than Woolworths anticipated, and Woolworths had to write down its value several times.

The debt incurred from the purchase also caused problems. Woolworths’ interest expense ballooned after the acquisition, outweighing the profits from David Jones.

In the end, Woolworths sold David Jones in 2022 for a fraction of what they paid for it. This was a major loss for Woolworths and is considered one of the biggest corporate blunders in South Africa.

In its latest full-year results, Woolworths’ revenue and profits took a hit as consumers continue to find themselves under pressure in South Africa and Australia with little cash to spend. 

This was the company’s first set of results without Australian retailer David Jones included, following Woolworth’s sale of the company last year. Thus, the results are not directly comparable. 

However, even if David Jones’ contribution to the prior period’s results are excluded, Woolworth’s revenue and profit still came under pressure. 

Group turnover for the period was down 16.7% to R37.5 billion. However, the value of its continuing operations was marginally higher at 5.1%.

Profit from continuing operations took a heavy hit, declining by 14.2% before tax, while headline earnings per share declined by 7.4%. Woolworths cut its interim dividend by 6.6% to 148 cents per share.

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