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When Shoprite starts to battle we know we’ve got a problem


When Shoprite starts to battle we know we’ve got a problem

Results were unexpectedly poor for a company that had a strong track record, even in the tough times

Chris Gilmour

Following in the footsteps of former Shoprite CEO James Wellwood “Whitey” Basson was never going to be an easy task. But new CEO Pieter Engelbrecht has experienced nothing short of a baptism of fire since taking over last year.
Results for the year to end June 2018 were unexpectedly poor for a company that hitherto had a particularly strong track record, even in the tough times. The numbers largely reflect the extremely difficult economic circumstances being experienced by South African and African consumers, and he had several other nasty surprises to contend with.
Group turnover, consisting mainly of Shoprite and Checkers stores in SA and Shoprite stores in the rest of Africa, grew by 3.1% to R145.3bn. The South African supermarket segment grew by 6% and, excluding the effect of new floor space, this was only 1.9%. Rest of Africa revenue declined by 7%, and by 12% excluding new floor space.
Former star performer Angola plummeted by 26.1% in rand sales. Its local currency, the kwanza, saw a 50% devaluation against the US dollar, so no surprise that for this financial year the economy of Angola was assessed to be hyperinflationary and reported accordingly.Despite this poor top-line performance, via relentless and remorseless cost control, the group managed to achieve a near-record gross profit margin of just under 24%. Diluted headline earnings per share came in at 968.7c, a decline of 3.8%.
The financial year was marked by several extraordinary negatives, such as the first VAT rise in 25 years, a record number of items experiencing deflation, the maiden implementation of a sugar tax, and the listeriosis crisis caused by an outbreak at a Tiger Brands factory in Polokwane.
Another of these extraordinary events was heightened crime. During the year Shoprite experienced a 34% increase in armed robberies to 489. It’s not just the immediate effect of those shocking raids that affects business because for about three weeks after such an event the customers just don’t come back.
Although shoppers might find this difficult to believe, over 13,000 products on Shoprite’s shelves were cheaper than the previous year. Such widespread deflation affects retailers badly as they must sell more volume merely to stand still. And the listeriosis outbreak hit Shoprite harder than many other food retailers because it tends to be over-indexed in low-end items such as polony.
Checkers turned into a more upmarket brand
The Shoprite brand tends to be synonymous with budget-conscious customers. However in the past two years, in a cleverly-calculated strategic move, the group has been promoting Checkers as a more upmarket brand. This strategy appears to be working, on a few fronts. It is investing more in fresh produce, with its growth in this category being twice that of the growth in fresh produce at other retailers. The group also launched around 100 new convenience food products during the year.
It is not clear, however, from where these convenience offerings are being sourced, and Shoprite is being rather vague. There is little spare capacity capability in convenience food manufacture in SA and it is thus imperative to have secure and sustainable agreements in place. Pick n Pay made a valiant effort to compete in this segment just over a decade ago but failed due to suppliers not being able to sustain their effort.
By Shoprite’s own admission, the 2019 financial year is likely to be very tough. On a price-earnings ratio of around 23 times at the current share price of around R205, it is expensive. However it’s not the priciest in the sector, with Pick n Pay being on around 25 and Clicks on 27 times. The share price has been in secular decline since March this year, when it peaked out at just over R275. Notwithstanding the fact that Shoprite is probably SA’s best-run retailer, the grim consumer outlook for the next few years makes it look somewhat expensive.
Chris Gilmour is an investment analyst.

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