Food retailers are in for a tough winter as load-shedding is expected to increase, further adding to the cost of keeping produce cold and cutting into profit.
Much has been said about how small businesses such as restaurants cannot withstand the cost and frequency of outages, but if there is any doubt just how bad load-shedding is for big businesses, Pick n Pay’s full-year 2023 results released last week make it clear.
Pick n Pay said it would have earned 7% higher profit before tax were it not for its R522m diesel expense and it warned that its 2024 earnings would also be hit by load-shedding, with little improvement in profit expected.
Its share price plummeted to a 10-year low after the release of the results.
“Load-shedding impact was felt on every line of our income statement,” Woolworths stated in its half-year results to December 26, noting food worth R20m was wasted in the six months due to interruptions to the cold chain.
Woolworths’ food gross margin dropped from 24.1% to 23.8% specifically due to load-shedding expenses.
While Shoprite, which spent R500m in the six months to January 1 on diesel, said it expected its fuel expenses “to remain notably elevated”.
It has also planned for increased maintenance costs as a result of the power outages, especially for its refrigeration equipment.
“Maintaining the cold chain during load-shedding requires using diesel generators, which are approximately five times more expensive than using grid supplied power,” said M&G Investments analyst Damon Buss.
To make things worse, analysts predict stage 8 to 10 load-shedding in winter — meaning even more diesel will burned.
In The Conversation, University of Johannesburg physics professor Hartmut Winkler says SA’s power consumption in winter rises from 32GW to 36GW, due to heating requirements and the longer time lights stay on.
He says Eskom tries to reduce maintenance in winter, but too many plants will be non-operational this year and predicts the midwinter shortfall will be 2GW higher than it was in 2022.
This means an overall shortfall of 8GW on some days, which equates to stage 8 load-shedding, with up to 12 hours a day without power.
Buss said energy expert Clyde Mallinson has worked out that if Eskom’s energy availability factor runs at the low 40% achieved in January and February there will be a shortfall of 8000MW-10,000MW in the midyear. Eskom has yet to have to institute stage 10 load-shedding.
“I think the retail sector in general is in for a difficult year,” Gryphon analyst Casparus Treurnicht said.
To make matters worse, “the consumer is going to struggle too”.
Treurnicht said that is why “Gryphon is sticking to its macro view that SA will be experiencing difficult times in the years ahead”.
Certain retailers are better able to cope with the increased costs of security, diesel and food waste, as well as generator and equipment maintenance caused by blackouts.
“Woolworths and Shoprite are able to weather this increased cost substantially better than Pick n Pay, as they have higher profit margins,” said Buss.
Pick n Pay has the lowest trading margin of retailers at 2.7%, with Shoprite at 5.8% and Woolworths 6.7%.
Makwe Masilela, chief investment officer at Makwe Fund Managers, said: “What complicates Pick n Pay’s situation is that they’re also right in the middle of rolling out their most important strategy,” referring to their Ekuseni plan.
Ekuseni includes expanding the number of profitable Boxer discount supermarkets and Pick n Pay clothing stores, as well as splitting Pick n Pay into two distinct brands with store refurbishments.
Pick n Pay said it is responding to load-shedding by implementing an energy resilience plan, which includes tighter store disciplines, accelerated investment in LED and more efficient refrigeration. It is also trialling battery energy storage systems and other similar technology.
As all retailers invest in backup and solar power at distribution centres and energy-efficient lighting, Buss expects things will improve in the medium term, and the market is being too pessimistic about certain retail stocks.
“We don’t think load-shedding is going to end, but rather that the very high levels being experienced will be transitory.”
Buss said: “While the near-term outlook does look dire, we think the load-shedding challenges will ultimately prove transitory given the amount of investment in alternative power sources by the private sector in both businesses and households.”
He also believes Eskom’s supply will improve when out-of-operation units at Koeberg and Kusile power stations are brought back online.
“Valuations of retailers seem to be pricing in the current poor conditions into perpetuity, rather than expecting the load-shedding challenges to be overcome in the medium term.”
He said retailers are trading at lower multiples than they did during Covid-19. “In our view, this provides a good buying opportunity of select retail stocks.”
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