Making a difference within and beyond its doors

Shoprite’s biggest store expansion is a bold move in a struggling economy with high unemployment, interest rates and inflation. However, the company makes no bones about playing the long game, investing through the cycle for better days to come.

And most analysts canvassed say the group, which has a store footprint of nearly 3,000 and low gearing levels, is in a good position to do so and is likely to continue gaining market share at the top and lower ends of the market through its Checkers, FreshX, USave and Shoprite brands.

Speaking this week at the group’s results presentation for the 52 weeks ended July 3, CEO Pieter Engelbrecht said in an environment in which there is a lot of pressure on everybody due to low economic growth and high inflation, unemployment and interest rates, it is easy, “like the tortoise, to pull back into your shell and wait”. 

But this is not what the group will be doing, instead opting to open at least another 275 stores in the upcoming financial year, the “highest number we have ever done in a single year”.

Of this number, 220 will be rolled out in SA, with 95 of them Shoprite or USave outlets. The expansion is part of the group’s R5.9bn capital expenditure programme.

It will also increase its distribution centre space by 220,000m² in the next two to three years, in tandem with expansion of its stores and online business.  

In an interview, Engelbrecht said he is not concerned about the high interest rate environment. The company has “very low debt levels”, with total borrowings of R5.5bn and free cash flow of R6bn.

As for SA’s economic problems, Engelbrecht said the “macro economy is not what we look at when we look at expansion and investment”. Rather, Shoprite looked at opportunities to increase market share, especially where “we are currently not represented or underrepresented”.

And the group could see such opportunities,  especially now that Shoprite was “really trading properly” across the entire spectrum of consumer demographics. 

This week the group reported record market share gains of R6.2bn across its brands for the period, its biggest gain in a single year. It gave the Shoprite group a market share of 32.1%.

Of the R6.2bn, Shoprite and Usave account for R3.3bn, while R2.9bn has been attributed to Checkers and Checkers Hyper.

Independent research analyst Chris Gilmour, who heads Gilmour Research, said Shoprite’s expansion is a “very bold move”.

“Pieter Engelbrecht and [former CEO] Whitey Basson before him are very methodical people and don’t do things on a whim. They thought this one out very carefully.  Shoprite is looking through the cycle, even with all the bad news, for better days to come.

“They have taken the view that they will be one of the survivors and they really will be, without a shadow of a doubt,” said Gilmour.

Peter Armitage, who heads Anchor Group, said Shoprite is “the one company that should be expanding now”.

“They have their model 100% right, they are getting the right gross profit, they are getting the margins. They have got the profile of their stores right, segmented into the different markets, so when your business is close to excellence on all these scores, you roll out, as long as you are not cannibalising your existing stores,” he said.

All Weather Capital portfolio manager Chris Reddy said Shoprite has capacity to “increase market share in the Shoprite and Checkers formats” as it targets consumers across income segments.

As for the South African expansion, Reddy said a large portion is in the lower- to middle-income segments and that property landlords had been telling the market for some time that Shoprite was  trading exceptionally well in their malls.

“I am a bit less concerned about the quantum of capex spend planned when there is still ample opportunity for them to grow market share in this environment, coupled with a degeared balance sheet. [As is] often the case with a good management team, the market underestimates the growth levers available to the company.”

Casparus Treurnicht, portfolio manager and research analyst at Gryphon Asset Management, said Shoprite's expansion will be positive for the take-up of surplus space in the retail property market.

But he described Shoprite’s targets as “ambitious” given the economic climate. The group was “strong enough to look through the dip”, but the market might become oversaturated in some areas.