Shoprite’s success lies in close ties with suppliers - Analysis
Every year, in the third or fourth quarter, Shoprite has a tradition of honouring its top suppliers, which have clung to the tailcoats of the retailer as it invaded several lucrative African markets on its way to dominating food retailing on the continent.
In the past, blue chip suppliers such as food manufacturer Tiger Brands, Procter & Gamble, Unilever, Cadbury, Kraft Foods and many others have reaped rich rewards from their close commercial association with Shoprite as Africa’s largest and most successful retailer opened more supermarkets across the continent.
Retailers make money by sourcing lowly-priced merchandise, or stock, from suppliers and selling it to customers at higher prices.
According to Shoprite’s 2015 full-year financial results, the retailer bought merchandise worth R90.1 billion from its suppliers, which it then sold to customers for R113.6bn, pocketing a handsome gross profit of R23.5bn.
The previous year, Shoprite procured merchandise valued at R80.9bn and sold it for R102.2bn, making a gross profit of R21.2bn. It is not only manufacturers that make money from doing business with the retailer, owners of shopping malls make a healthy income too. Last year Shoprite spent R3bn renting premises from property owners and the year before spent R2.6bn.
This vast buying power, which Shoprite uses to negotiate discounts with its suppliers, partly explains the retailer’s success. It has another secret weapon that it utilises to devastating effect to undercut its competitors: it has invested billions of rand to develop a network of advanced distribution centres with their accompanying transport operations.
In its 2015 annual report, Shoprite said the distribution centres were supported by sophisticated information management systems.
“We created a network of advanced distribution centres to which manufacturers deliver their products and from where we distribute to our stores according to their requirements. Ours is the responsibility for getting the right product to our stores at the right time,” chairman Christo Wiese said in the report.
Shoprite’s suppliers feed the distribution centres with products that are then shipped to 1 825 corporate and 363 franchise outlets in 15 countries across Africa and the Indian Ocean islands. The company’s operations are manned by 132 942 staff, the bulk of which are employed in South Africa.
It is this formidable, well-oiled retailing machine that the US retailer Walmart ran into in 2012 when it acquired 51 percent of Massmart for $2.4bn (R34.5bn at yesterday’s rate), marking its entry into Africa.
Walmart marched into South Africa, the home market of Shoprite and Massmart, bragging about its sophisticated global supply chain, which enables it to undercut its competitors and pass on the savings to its customers in the form of the lowest prices possible.
But the US retailer drew the attention of South Africa’s militant trade unions, which vehemently opposed the acquisition, arguing that Walmart would use its mighty buying power to bring cheap imports into the country, destroying local suppliers and thousands of jobs along the retail industry supply chain. The unions received support from the government, which placed conditions on Walmart/Massmart to protect local manufacturers and workers from the adverse effects that may arise as a result of the transaction.
In the end Walmart and Massmart were forced to set up a R200 million supplier development fund (SDF) in 2012 as a precondition for the approval of the acquisition by the competition authorities. The mission of the fund was to boost local suppliers, create 15 000 jobs, develop 1 500 emerging farmers to supply Massmart with fresh produce and to identify small businesses that could be scaled up to supply reliably to stores in the group, such as Game, Makro, Dionwired, Jumbo and Builders Warehouse.
However, Massmart says the onerous requirements to develop local suppliers have not hindered its ability to procure stock at competitive prices.
“The SDF has improved our supply chain by giving us a more diverse supplier base (not over reliant on one big supplier). In a few cases we have also managed to manufacture import replacement products (plumbers tape),” reveals Massmart corporate affairs executive Brian Leroni.
Last year, Massmart sourced merchandise worth R68.7bn from suppliers which it sold to shoppers for R84.7bn, generating a gross profit of R16bn. The general merchandiser spent R2.9bn leasing premises for its stores from property owners.
Shoprite’s planned expansion this year is set to bring more benefits for its suppliers.
Suppliers stand to place more of their merchandise in Shoprite’s supermarkets as the retailer plans to open 35 new stores across Africa by June, adding to the 189 supermarkets it operates in 14 countries beyond South Africa.
Shoprite also plans to increase the procurement of fresh produce from local farmers on the continent, but they will have to meet the retailer’s food quality and safety standards.
“Specialists in soil management, seed selection and harvesting technology are engaged to present workshops for developing farmers and undertake skills transfers in their specialist areas,” Shoprite’s group chief executive Whitey Basson said in the report.
“More than 200 vegetable farmers have growing programmes to supply to the group’s stores.”
* Andile Ntingi is the chief executive and co-founder of GetBiz, an e-procurement and tender notification service. Visit www.getbiz.co.za for more information.
** The views expressed here do not necessarily reflect those of Independent Media.