Shoprite eyes wallets of upmarket consumers

Retail giant Shoprite, which operates a discount retail model that has been a hit for decades with its core cash-strapped consumers, is turning to upmarket wallets and further Africa expansion to ride out SA’s perennial retail malaise.

Shoprite CEO Pieter Engelbrecht plans to ramp up the retailer’s exposure to affluent and higher-income consumers – a market traditionally conquered by Woolworths.

“We need to outrun our competitors. We have to fight to get the consumer spend and grow our upmarket share of the wallet,” said Engelbrecht at the company’s results presentation for the year to July 2, 2017.

To some extent Shoprite continues to buck retail trends, dampened by low consumer confidence and low spending. Its group revenue grew by 8.4% to R141 billion while sales on a like-for-like advanced by 5.8%.

“A 5.8% like-for-like growth is certainly best in its class in this constrained consumer environment,” said Anthony Rocchi, a portfolio manager at Rexsolom Invest.

Trading margins – a key metric used to measure profitability in the retail industry – grew by 5.8% compared with 5.6% in 2016.

Working hard to win the hearts of higher-income consumers is Shoprite’s subsidiary Checkers. The brand, which operates 246 stores in SA, grew sales by 8.5%, just less than Shoprite’s LiquorShop.

Engelbrecht said its corporate strategy is not about replicating Woolworths, but to “dismantle the monopoly of premium food trade”.

“Currently 1.9 million upmarket customers frequent our stores but not exclusively. The customer in this segment is four times more lucrative than our average customers in terms of basket size. We want them to shop with us.”

The work to woo these customers began two years ago.

Shoprite opened new generation Checkers stores in affluent areas boasting a wide selection of fresh produce, wine, meat, cheese and more than 100 convenience food products. It plans to open 14 new Checkers stores in 2018.

Shoprite roped in international chef Gordon Ramsay to develop a range of convenience and ready-to-eat meals – from gourmet oxtail stews and cottage pie to lamb shanks. Convenience food has been the mainstay of Woolworths’ food business.

A big focus will be on private label products, which are cheaper product alternatives to branded ones and generate higher margins, as they don’t require much-branded packaging and advertising costs. Since January, Shoprite has launched 341 new products, helping to lift its private label participation by 1% to 14.7% vs an industry standard of 18.5%.

Alec Abraham, a senior equity analyst at Sasfin Wealth, said Woolworths’ quality and convenience foods offering is miles ahead of Checkers.

“Checkers was late to open stores in upmarket areas but the retailer has been doing a phenomenal job to change this. In terms of premium quality, Woolworths is streets ahead of everyone and no one can come close.”

Abraham said Checkers has been taking market share from recovering Pick n Pay rather than Woolworths.

Africa expansion

Shoprite plans to expand into the African continent and Eastern Europe, where it’s investigating store openings in Poland.

Shoprite’s operations in 14 other African countries spanning 308 stores grew sales by 11.7% in rand terms and 31.6% in consistent currencies. “We are busy with five projects in Africa to enter new countries,” said Engelbrecht.

Steinhoff recently purchased a 22.7% stake in Shoprite, which is part of the planned listing of Steinhoff’s African assets including discount clothing retailer Pep.

Abraham said Shoprite, which has no distribution centres outside of SA, might piggyback off the distribution centre capacity of Steinhoff’s Pep to expand further into the continent. Pep has three distribution centres in Southern Africa.

Damon Buss, an analyst at Electus Fund Managers sees it differently. “The only synergy from the tie up could be from being able to negotiate better rentals, as they will have more stores/require a larger footprint in retail developments. We don’t see any synergies in the supply chain given the disparity of products [Shoprite’s food and Steinhoff’s furniture],” said Buss.

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