With new store openings and a need for bigger and efficient distribution centres (DCs), SA’s big retailers, Pick n Pay and Shoprite, have teamed up with Equites Property Fund and Fortress Real Estate Investments to develop prime logistics facilities to optimise their supply chains.
In Gauteng, Pick n Pay and partner Fortress are developing a new distribution centre, Eastport, to consolidate the JSE-listed retailer’s Longmeadow distribution centre and three smaller facilities.
Marcel Basson, a retail executive at Pick n Pay Supply Chain, said the facility will be 45% larger than Longmeadow and with 50% more capacity and enhanced systems and layout. It is targeting a 12% decrease in the cost-per-case delivered over the next five years.
“The Eastport distribution centre will support our growth ambitions by improving efficiency and reducing costs,” Basson told Business Day.
Basson said the facility will also provide the capacity for the group’s store expansion plans by catering for future customer demand. Upon completion of the Eastport distribution centre during the 2024 financial year, the group will have eight distribution centres with a combined distribution capacity of about 377,000m2 of gross lettable area (GLA).
“Eastport will complete our centralisation process in Gauteng and further strengthen our strong supply chain and improve efficiency gains,” said Basson.
Furthermore, the facility will unlock huge benefits for customers — ranging from more competitive prices to better product availability as the facility enables the company to work with more suppliers.
Joint venture partnerships
With a GLA of about 165,000m2 and scheduled for completion in June, the Eastport distribution centre carries a cost of about R2bn, including land and construction, with Pick n Pay’s 60% share estimated at about R1.2bn. Pick n Pay has an option to renew its 15-year lease agreement.
Bruce Collins, head of asset management at Fortress, said there is intensive capital tied into developing bespoke distribution centres.
Retailers want to control what they know and what they are good at, hence they outsource this function to real estate specialists like Fortress and Equites. The two companies also have strong balance sheets, making it feasible to undertake these huge logistics developments.
“Retailers see a better return on equity through investing in their business such as expansion, store refurbishment, better merchandise and staff training, for example,” said Collins.
The Spar group, with its biggest facility in Jet Park in Gauteng, prefers to own its distribution centres and leases space for overflow when needed. Woolworths outsources the distribution function to third-party logistics providers who in turn lease facilities for this function.
Collins said SA is experiencing demand for logistics assets, and most of this activity is consolidations, as is the case with Pick n Pay’s Eastport distribution centre.
“For the last decade or so SA has been transitioning from a manufacturing economy to a distributing economy. This deindustrialisation drives demand for distribution sectors as most of the imported stock is stored before being distributed,” said Collins.
SA is an enormous economy, he said, though growth is slow. However, the growing population presents opportunities for food retailers — and demand for distribution centres.
To optimise its supply chain, Shoprite and Equites formed a joint venture (JV) partnership — Retail Logistics Fund (RFL) in 2020 — in which Shoprite contributed a portfolio of distribution centres valued at about R2bn with Equites injecting cash of R2.1bn.
Shoprite wanted to optimise the return on investment, invest into higher yielding retail projects and technology, provide both operational and capital flexibility, and form a strategic partnership with a best-in-class logistics property company in SA.
In December 2022, the fund announced two transactions — the sale, as well as the lease and development of a logistics campus for Shoprite in Gqeberha in the Eastern Cape — to meet distribution centre capacity in the province and ease pressure on the Shoprite Cape Town distribution facility.
Last month, RFL said it will, through a sale and development lease agreement, spend R1.16bn on acquiring and developing a prime logistics park for Shoprite in KwaZulu-Natal.
The fund will lease the existing park to Shoprite for 20 years with the right to renew for three additional 10-year periods, as well as extend the property for more than R422m. Equites’ interest in the Shoprite portfolio will be about R4bn on completion of all developments.
For the financial year ended in July 2022, the group said Shoprite’s supply chain transformation will see the development of the new distribution centre capacity of over 200,000m2 in the next two to three years to complement larger distribution centres with smaller, nimbler and e-commerce-ready infrastructure.
“Our multiyear supply chain expansion begins with the construction of the new 85,000m2 Gauteng facility during the first quarter of 2023,” said CEO Pieter Engelbrecht.
Building warehousing capacity
The group, with about 3,000 stores, will open 275 new ones in 2023, of which 220 are in SA — and it will continue to invest in and grow its core SA business.
Equites CEO Andrea Taverna-Turisan said with Shoprite’s new store openings, having distribution capacity is key to their supply chain.
“To be successful in the supermarket business, you need product on shelf, and to ensure that, you need to have the product in your distribution centre to supply to the store when needed,” he said.
Taverna-Turisan said Shoprite’s forward thinking in making the best of its supply chain enables the group to win market share in the sector.
“Their growth ambition and decision to sign up four logistics projects with Equites is a reflection of the quality and value we offer in the market.”
JSE-listed Equites is a specialist owner and developer of prime logistics assets in SA and the UK valued at R26.3bn at the end of August. Its tenants are multinationals that are prepared to sign leases for 10, 15 and 20 years and who, given their commercial might, tend to meet rental payments on time.
Financial gain
The Shoprite deal enables the retailer to optimise its supply chain and meet warehousing capacity from new stores. Equites will grow its SA portfolio through high-quality acquisitions and developments and position itself as the logistics developer of choice.
Taverna-Turisan said Equites’ 13.9 years group weighted average lease expiry is expected to exceed this by 2025. SA, now at 13.3 years, will peak to over 14 years during the same period as the company focuses on building resilience, particularly with Shoprite.
He said the 20-year triple net leases are a strong covenant in debt capital markets at a time when capital markets are tough for most property companies.
A triple net lease agreement involves tenants paying all the running costs of the property leased such as maintenance, security, rates and taxes.
The Shoprite rental, based on the initial yield of 7.75%, in line with the actual development cost, will increase by 5% annually. That translates to between 7%-8% growth in annual cashflows on a geared basis.
Additionally, there will be 5% growth in asset values translating into about 7% growth in asset value, on a geared basis, with internal rate of return expectations of between 13%-14% on a geared basis.
Taverna-Turisan said the development of more than 600,000m2 of distribution capacity will more than double the size of Shoprite’s warehousing capability.
“Given the group’s expansion, I wouldn’t be surprised if Shoprite would want to put DCs in strategic localities in phase two based on store footprints which will further ease pressure on distribution centres,” said Taverna-Turisan.
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