SA’s food retailers face a tough 2023 with fears of global recession, increased costs of insurance and high levels of load-shedding that leads to food waste and fewer consumer visits.
Usually, food retailers profit from inflation but in an investor call update last year, Shoprite said it had not benefited from rising prices for the first time in more than two decades.
Retailers, while facing spiking costs, are trying to grow volumes in a stagnant economy, which requires stealing market share from competitors and one strategy to achieve this is to cut prices.
All Weather Capital analyst Chris Reddy said retail profit margins could come under further pressure from the costs of operating generators, rental rates — which normalised after discounts during the pandemic — and higher finance costs.
Pick n Pay, whose annual revenue is about R97bn, is continuing to rebrand stores to meet two distinct market groups: the discount and higher-income markets.
In October, Pick n Pay CEO Pieter Boone said the first 41 revamped stores had led to a 3% increase in average basket value, a more than 20% increase in sales in grocery categories and an improvement in customer service. These preliminary figures suggest Pick n Pay could benefit as more stores are rebranded.
Pick n Pay has also partnered with Naspers-owned Takealot and uses their Mr D food delivery service for groceries from more than 300 stores. It recently opened its first Takealot counter in a Pick n Pay store in Table View in Cape Town where customers can collect parcels in-store. This could drive foot traffic if expanded.
Pick n Pay’s forward price to earnings (PE) ratio sits at 18.57. A PE ratio is used to value the share price of a company against its annual earnings. This way investors can compare them easily with peers. The forward PE is a prediction of what is expected over the next year.
Shoprite, which brings in R187bn in annual revenue, has data on almost 24-million customers through its two rewards programmes, and is the market leader in grocery retail.
To increase revenue it has expanded into multiple sectors such as pet stores, camping, baby goods and clothing, as well as low- income consumer banking.
The management team is well respected by the market and understands the consumer. One example is Shoprite offering bank accounts that do not permit debit orders because low-income earners will be more likely to keep their money in an account that cannot gobble up cash for outstanding debt.
In December, Shoprite was successful in persuading the Competition Tribunal to let it buy Massmart’s 42 Cambridge and Rhino stores, and their adjacent bottle stores, 12 wholesale Masscash stores and a meat production facility.
This purchase, which allows Shoprite to expand and to gain more liquor stores without applying for individual licences, is something Spar and Pick n Pay unsuccessfully fought at the tribunal.
Shoprite’s Checkers Sixty60 delivery service has brought in new consumers, with about 10% of users that were not Checkers customers previously. It continues to trade in 10 African countries and while there was talk of exiting Malawi last year, this was halted.
Shoprite has a forward PE of 18.49.
Spar, which earns more than R135bn annually, is a wholesaler that sells food and liquor to individual stores that offer convenience in the suburbs. But its SA business is facing continued competition from Pick n Pay and Checkers’ online delivery services. The company has debt of about R10bn, thanks to a costly expansion in Ireland and Poland.
The company runs at a loss in Poland where it bought a wholesaler in 2019, and last year it cut ties with 58 of 208 stores in the eastern European country as they were buying too few goods from it. This means it will take even longer than planned to break-even there.
Its forward PE ratio is lower than its peers, however, at 9.4.
Reddy said “Spar is facing significant cost pressures in Ireland and Switzerland along with Poland. In SA they continue to lose market share.” The balance sheet is also stretched with the costs rising as a result of a new SAP software rollout, he said.
“There have also been a few negative media reports that speak to issues around governance. These are reasons why the large discount to peers may be warranted,” Reddy said.
About 75% of Spar profit comes from its SA liquor, hardware and grocery businesses. Reddy is not sure how these will grow “given the market share losses”, while in SA home improvement spend has dropped since lockdowns ended.
Woolworths finally sold Australian department story David Jones in December and is now able to focus on SA and its successful Australian clothing business, Country Road.
Retail analyst Chris Gilmour said management insisted David Jones, the bulk of which runs at a loss, was not a distraction “but in fact it was”.
“It wasn’t core to Woolworths’s strategy. However, Woolworths now has to really start giving serious attention to its food division, which is under relentless attack from Checkers and the upper-end of Pick n Pay.”
With operating margins of 7% in its food business, Woolworths may have the ability to lower its food prices.
Woolworths’s forward PE ratio is 14.3, lower than that of Pick n Pay and Shoprite, which is likely because it includes the SA clothing business which is showing signs of improvement.
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