Booze boosts retailers as consolidation takes hold

The number of liquor stores operated by the country’s three largest supermarket groups – Shoprite, Pick n Pay and Spar – has come close to doubling over the past five years. At their most recent reporting periods, the three had a total of 1 329 bottle stores, from under 900 at the same points in 2012.

Tops at Spar remains the market leader, both in terms of number of stores and retail turnover (not to be confused with the wholesale turnover that the group reports). At the end of March, Tops had 896 stores in the Southern African region. In the 12 months to end March 2017, Tops had retail turnover of R9.4 billion, 9% ahead of the prior comparable period.

Spar noted in its interim results, however, that “retail turnover growth [was] affected by aggressive competitor entry into market”. This is a direct reference to Shoprite, which in the last year opened one store a week (54 outlets)!

Its liquor business, which comprises 216 Shoprite LiquorShop and 160 Checkers LiquorShop stores, grew turnover by 22.7% to R4.8 billion. Shoprite operates a further 13 stores in Namibia and one in Lesotho. In the last five years, its number of liquor outlets in South Africa is up 132% and it is no surprise that Shoprite has been as aggressive as it has been. Sales growth is running north of 22%, with what the group terms “an exceptional return on investment”.

Fewer than half of the group’s Shoprite SA supermarkets have a LiquorShop trading nearby. But, in the case of Checkers, two out of every three supermarkets, including Hypers, do. One seldom sees a new Checkers store open without a LiquorShop attached these days.

Pick n Pay does not separate retail sales by division as it defines only two segments: South Africa and Rest of Africa. However, the group said its liquor business grew by 15% in the 52 weeks to February 26 2017, “with solid market share growth across a number of key lines”.

Massmart’s Game business has also entered the retail liquor market alongside its push into food (especially fresh). The offering has been rolled out to 40 of its approximately 120 stores in South Africa. It says food and liquor makes up about a quarter of Mass Discounters’ turnover, meaning that together this is a R5 billion-a-year business.

¹ This comprises H2 FY2016 and H1 FY2017

² For the ‘South Africa’ segment, including supermarkets, franchise, liquor, clothing.

Contrast the performance of these liquor businesses with food retail which is at best generating growth of four percentage points above inflation (Shoprite) and at worst flat (Spar). In all three retailers, turnover growth in their liquor business is at least double that of their supermarket divisions. Profit margins are surely better, too. Some analysts point to Shoprite’s ancillary operations (liquor and financial services) as a reason why its trading margin of 6.31% is by far the best in the industry. Similarly, some have questioned how razor thin Pick n Pay’s core trading margin is, excluding the liquor, franchise and clothing operations.

Shoprite says its market share, presumably for formal liquor retail (i.e. excluding wholesale), is 18.2%. Using this, one can extrapolate that Tops at Spar’s market share is probably around 35%. Pick n Pay is likely in the lower teens. This would mean that the other groups and independents share the remaining 30% of the retail market. The total alcohol market is around R100 billion a year, according to South African Wine Industry Information & Systems data.

Interestingly, with the data provided by Shoprite and Spar, both group’s stores tend to trade at an averageturnover of R250 000 a week (R247 442 vs R256 410, respectively). This calculation is impacted by the addition of stores during the period and is higher for stores that have been open for at least a year. It would not be a stretch to suggest that top-performing stores are running at a rate that is triple or quadruple that.

A White Paper (alcohol-related harms reduction policy) published by the Western Cape Government in August seemed to effectively ban bottle stores attached to supermarkets, with a phasing out over five years. Reports said that “Bottle store owners could retain their licences‚ but outlets cannot be within 50 metres of a supermarket”.

This is not what the paper proposes, however. Rather, the policy “proposes the phasing out of grocer liquor licences over five years where there is an off-consumption liquor outlet within 50 meters from that grocery store… An option to convert the right to sell liquor on different premises than that of the grocery business will still be available”.

This is materially different from what practically every report over the past few months stated. Effectively supermarkets will no longer be able to sell wine, if they are within 50 metres of a bottle store. This makes logical sense, especially as retailers push to open these ‘complimentary’ outlets next to or near each other. The paper notes that a similar process is underway in the Eastern Cape.

Consolidation of the formal liquor retail market is certainly taking hold, with the number of independents visibly dwindling in metros, cities, towns and outlying areas.

Beyond these larger groups, there are three other players at scale: Overland (franchise) at just under 300 outlets, and Liquor City (franchise) and Blue Bottle (buying group), each with just under 250. Wholesale Ultra Liquors operates around 60 stores, with some smaller regional groups in the Western Cape, Eastern Cape and Kwa-Zulu Natal.

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