The diverging fortunes of SA’s leading food retailers Shoprite and Pick n Pay are an illustration of how capital allocation decisions can shape long-term success as these two giants — once considered peers — have taken vastly different paths, with outcomes that speak volumes.
According to the head of research at Old Mutual Wealth Private Clients, Victor Mupunga, in the past two decades Shoprite has stayed ahead of Pick n Pay by consistently reinvesting more of its capital into expanding its distribution network, store footprint, and IT systems, while Pick n Pay prioritised paying high dividends over growth.
This long-term focus on reinvestment allowed Shoprite to build a strong market position and scale advantages that Pick n Pay struggled to match.
In 2004, Pick n Pay was the undisputed leader in SA retail, valued more than R11.2bn — well ahead of Shoprite’s R7.1bn. Today, however, Shoprite’s market value has surged to about R163bn, making it several times larger than Pick n Pay’s R19.5bn. It is, however, worth noting that Pick n Pay recently unbundled its lower LSM-targeted Boxer with its 65% stake also worth about R19.5bn.
According to Mupunga, the stark difference lies in how each company managed and allocated its capital. Between 2000 and 2004, he said both companies generated similar free cash flow, but from there, their strategies diverged dramatically.
Pick n Pay focused on maximising shareholder returns, growing dividends at a compound annual growth rate of 25%, while only increasing capital expenditure (capex) by 12%. On average, Pick n Pay paid out 76% of its earnings as dividends, significantly limiting funds available for reinvestment.
In contrast, Shoprite adopted a more balanced approach. Mupunga said Shoprite “matched its dividend growth with a similar level of reinvestment into the business”, building robust distribution networks, IT systems and store footprints. This aggressive reinvestment strategy laid the foundation for Shoprite’s enduring market dominance, enabling it to offer lower prices through superior scale and efficiency.
Shoprite was not without its challenges. Mupunga said 2018 and 2019 were among the retailer’s toughest years, marked by a 60% share price tumble due to overextension into other African markets and associated foreign-denominated debt.
“Adverse currency moves, difficulty in repatriating cash to SA and weak commodity prices saw the group’s rest of Africa operations — once viewed as a key differentiator — become a burden rather than an advantage. However, actions taken by Shoprite’s management team turned out to be another example of effective capital allocation,” he said.
Key innovations such as Checkers Sixty60, the Xtra Savings loyalty programme and a shift to “asset-light” strategies including the sale and leaseback of distribution centres, were all part of disciplined capital reallocation, according to Mupunga. Shoprite turned negative free cash flow of R2.4bn in 2019 into a positive average of R4.3bn annually over the next four years, Mupunga noted.
Today, Shoprite continues to pursue growth through what Mupunga describes as “many small bets”. These include launching value-added services such as the mobile network K’nect, as well as expanding into adjacent retail categories such as baby clothing (Little Me), pet products (PetShop Science) and outdoor equipment (Checkers Outdoor).
The group’s fast-growing Sixty60 delivery service now features a R99 monthly subscription for unlimited delivery — a move aimed at boosting long-term customer loyalty rather than chasing immediate profit.
The retailer recently announced that it would be expanding the delivery service to selected Shoprite supermarkets across SA, bringing fast, affordable home delivery to even more customers.
Meanwhile, Pick n Pay has yet to recover from what Mupunga identifies as its critical error: prioritising dividends over reinvestment during a crucial growth period.
“In what at that time was a fast-growing economy, this focus on short-term gains rather than reinvesting into the business allowed smaller competitors like Spar, Woolworths and Shoprite to flourish. We believe that this capital allocation mistake has been Pick n Pay’s biggest error over the past two decades, and the company has not yet fully recovered from it,” he said.
Despite this blunder, in 2024 Pick n Pay successfully completed its two-step recapitalisation plan, including a rights offer and the Boxer IPO, which raised R4bn and R8.5bn respectively, enabling the company to repay debt and invest in its turnaround strategy, while setting it up for growth.
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