Shoprite: Light years ahead of its rivals

We don’t give up. Failure is not an option.

That’s one of the big lessons Shoprite CEO Pieter Engelbrecht learnt from 20 years of working closely with his predecessor, Whitey Basson.

It must have been a formidable set of footprints for Engelbrecht to follow. It was Basson, after all, who was responsible for growing Shoprite from an eight-store family franchise in the Western Cape into the retail juggernaut that today operates about 3,000 corporate stores as the biggest supermarket chain in Africa.

But Engelbrecht seems to have done alright for himself. The company has doubled in size in the eight years since he took over from Basson, it has nearly 30-million customers and, with 160,000 employees, it’s the largest employer in South Africa after the government. It’s opening a store a day. And it can tick off 58 consecutive months of market share gains in South Africa.

As Engelbrecht tells it, when he joined Shoprite in 1997 the business took 19 years to reach R10bn in revenue; today, it does R10bn every 15 days.

The numbers in the group’s interim results, announced last week, tell the story. Sales were R14.8bn higher in the interim reporting period, taking the total to R121bn, an increase of 14%. R9bn of that came from “other operating segments” (up 23%), including Transpharm, Medirite and Computicket. Non-South African supermarkets grew sales 6.2%, to R10.6bn. All for a gross profit of R28.6bn

Sales at its core supermarkets division — Shoprite, Checkers, Liquor and other — was up 14.6%, to R97.5bn. Group trading profit grew 10.7% with diluted headline earnings per share increasing 7.6% to 621.4c. Dividends rose 7.7% to 267c.

When it comes to market share, the group is sitting pretty too: the Shoprite unit has almost 20% market share in its lower- to mid-income category, while Checkers already has 15.2% in the premium end of the market.

It’s a difficult space though. As Sasfin Wealth senior equity analyst Alec Abraham tells the FM, what struck him most in Shoprite’s numbers and commentary was the sense of the collapse of consumer wealth to critical levels. That extreme pressure on the consumer is evident in negative volumes, he says, with consumers buying fewer items and more of the cheaper brands.

On top of that, “South African food retail is extremely competitive,” says Engelbrecht. “The margins are low, we have Amazon coming in, so you have to adapt and learn as the competitive landscape changes ... there are great competitors in South Africa and great brands. For some it goes better than others.”

There’s no doubt Shoprite is the one “going better than others” at present. 

Spar is grappling with software glitches that have cost it dearly. “And it seems to have lost its local competitive advantage with the delayed launch of on-demand [retail],” says Abraham. The exit from Poland, potential debt restructuring and potential Swiss exit haven’t done much to improve its fortunes either.

As for Pick n Pay, it’s still smarting from reporting its first-ever loss in its interim results to end-August. Then there was the recent announcement about a R4bn rights offer, which hammered the share price.

In Abraham’s view, the company is mired in an untested and unproven fix-up strategy with extremely high execution risk. “Against this background ... it’s difficult to imagine how it can halt the market share loss ... [It’s] no wonder the Pick n Pay share is just sinking further.”

In contrast, Shoprite’s strategy is to increase its store base and complementary retail offerings to grow its revenue base and take on as much market share as possible by “aggressively leveraging its value proposition and excellent execution”, Abraham says.

Indicatively, Shoprite shares are up about 5% over the past six months, while Spar’s have dipped more than 7%. Pick n Pay’s have  almost halved. Over a broader horizon, if you’d put R100,000 into Shoprite shares three years ago, you would have almost doubled your money with dividends included. Over five years, Shoprite’s share price is up more than 50%, excluding dividends. For Pick n Pay, an investor who’d taken a R100,000 flutter would be left with about R30,000 over five years, while a similar bet on Spar would have a punter poorer by more than half.

Casparus Treurnicht, portfolio manager at Gryphon Asset Management, believes the share prices of Spar and Pick in Pay are a realistic projection of where those companies are in regard to Shoprite.

“Shoprite is just focusing on what’s important and has done its work before in terms of distribution and logistics investment,” he says. “Pick n Pay made plenty of errors in this respect, and I’m not too sure if the Spar model is a better one than Shoprite/Checkers in the current environment where consumers will seek best price.”

It means that, “over time, the daylight between Shoprite and its largest competitors ... has increased”, says Shane Watkins, CIO of All Weather Capital. Fifty-eight months of market share gains is “just extraordinary”, he adds. “It’s hard to grow a business, but it’s even harder to grow a business that’s already large.”

For the most part, that’s down to Engelbrecht — a “whizz kid” who knows the business inside out, says independent retail analyst Chris Gilmour. “That’s why Shoprite is where it is today.”

It’s not bad for someone who didn’t plan on becoming a retail lifer. A chartered accountant, Engelbrecht had wanted to head to New York to work in corporate finance. But after a move to Joburg from Cape Town, he was called up by Pep founder Renier van Rooyen, who wanted some help with his private businesses in the Cape. There, he bumped into Carel Goosen — the retailer’s former FD. Twenty-seven years later, he’s worked in almost all the group’s divisions and numerous geographies.

“I certainly don’t regret my decision,” Engelbrecht tells the FM. “I love Shoprite, I love the people, I love South Africa.”

Same styles, different circumstance

If Engelbrecht is central to Shoprite’s success, comparisons with Basson are inevitable. Gilmour certainly sees a similarity — both are steeped in the business and have a steely resolve. “Here’s a guy who understands retail technology, he’s taken it to a new level”.

But, he adds, “Whitey was in an economy that was moving reasonably well; it’s incredibly difficult today.”

Engelbrecht would certainly agree. He didn’t talk about the challenges facing the group at last week’s investor presentation; that’s not Shoprite’s style. But speaking to the FM he says it’s tough doing business in South Africa. Which is why there needs to be a carefully executed plan.

“We don’t do knee-jerk,” he says. “We work in line with our strategy.” And that’s about ensuring it has loyal customers who spend more with the group.

Central to the plan is growing the group’s reach. “They’ve covered so many bases,” says Gilmour. “They sit in front of that big wheel; I can’t think of any other retailers that cover so many areas so well. Shoprite has got such strength, in depth, across the spectrum ... the one weakness might be furniture.”

That depth is in part the result of the group’s adjacent businesses — a veritable universe of interests. So, in addition to Shoprite, Checkers and Usave, and the liquor business (up 25.2%), there are pharmacy interests in Medirite and Transpharm (up 18.55%), all contributing to increased market share. There’s also Checkers Outdoor, OK Furniture and House & Home, clothing store Uniq, baby store Little Me, and Petshop.

That said, the adjacent businesses aren’t likely to move the dial tomorrow; they’re longer-term investments. And there are categories where the group is “underindexed” (personal care, pet care, confectionery, general merchandise, fresh and butchery products, health care and alcoholic beverages). If it increases the contribution of those categories, they will make a meaningful contribution.

More than just adjacent businesses, Shoprite’s universe consists of supplier partnerships with the likes of Krispy Kreme Doughnuts and Starbucks coffee. And don’t forget the group’s digital commerce arm, with Checkers Sixty60 and Pingo.

In Gilmour’s view, Sixty60 — along with the group’s distribution system — is the aspect that sets Shoprite apart. “Nobody in the world seems to make money from on-demand [shopping],” he says. “The big difference is they use micro-fulfilment centres in the form of their 2,300 stores about the country and it works incredibly well.”

As Engelbrecht explains it, the 2,300 Checkers Sixty60 outlets “means we are within 15 minutes of 85% of the addressable market, hence Sixty60 is very profitable for us. It’s quite a different model from dark store distribution models which are expensive to operate [and have] long distances for deliveries.”

Enter Amazon

Still, the group is trying to get further ahead, with Amazon soon to enter the market. It’s rewriting the Sixty60 platform and intends to offer more services through the omnichannel.

There’s a data analytics arm, too. Work previously conducted for Shoprite by global data company dunnhumby has been brought in-house on the Rex platform and is used to help suppliers adapt their strategies to optimise the sale of their products.

As Watkins sees it, Engelbrecht has in the course of his career seen retail evolve; where previously success came from trading, today it’s about the knowledge-based environment, with information and systems driving the processes.

As part of that knowledge environment, the group is using AI to help buyers work out the best pricing, and it’s at the point where it can sell its data insights to other industries.

The numbers Engelbrecht reels off are impressive. The AI pricing optimisation tool can do 400-million calculations in 30 minutes. It uses data about price elasticity, private labels, competitive products, volume and previous promotional pricing through more than 40,000 “stock-keeping units”.

The group is sitting with about 12 petabytes of data — equivalent, apparently, to 20-million tall filing cabinets. “It’s too vast to contemplate,” he says. “Just the ability to work through such amounts of data and get that turned into information to make decisions at the speed at which we have to move is completely different.”

It is, of course, about the customer first, he adds. So, in the interim period, Shoprite made 454-million personalised offers to shoppers based on their spending habits, offering instant loyalty-card discounts at till point worth R8.4bn in six months. It’s not just about high-end customers either. “We understand there are more than 10-million people who live off R350 a month, and we find them solutions,” says Engelbrecht.

It means the company remains obsessive about price. “That’s why we fight so hard for price. That’s why we sell over 1.5-million R5-and-under products a week (from burgers to cookies to chips). And I don’t see other retailers thinking like that, where we make it our duty to find affordable food solutions to help people survive.”

It's a sentiment Watkins echoes when he says he believes Engelbrecht “has deep empathy for the Shoprite customer ... their discounted food offerings with meals for R5, these are clearly not commercial decisions, rather they are designed out of care for their customer”.

Stumbling blocks

It’s not all been plain sailing, though. There was, for example, a “nerve-racking” switchover to the SAP platform. And the Africa debacle. The group was burnt on the continent, exiting Nigeria, Kenya, Madagascar and Uganda in rapid succession and keeping stores in just nine countries — most of them in Southern Africa.

As Engelbrecht explains it, there was the belief that Africa is a dollar economy, which proved to be untrue. Then there was extreme currency volatility, as well as hyperinflation in some markets.

“I was involved in many of those countries myself, I worked in India, in Egypt. I’ve travelled Africa extensively. At the time we all felt it was the right decision otherwise we wouldn’t have done it.” Leaving, it seems, was the right decision too — even if that was “emotionally hard”.

Still, Engelbrecht is keeping his eyes open for possibilities — though, at present “there isn’t another geographic area where I see us making an investment”. In any event, if Shoprite were to return to the continent more broadly, it would be as an omnichannel retailer. It just doesn’t make sense, he explains, to build a whole shopping centre to house a single supermarket.

There are, of course, the perennial South Africa-specific problems: the woeful state of the economy, enormous cost pressures, water and electricity challenges ... you name it. Engelbrecht also had to navigate through Covid, and the riots in KwaZulu-Natal. Simply put, “it is hard to do business in South Africa”, he says.

“As far as Shoprite’s concerned, we know we’re on our own, we take responsibility and don’t moan and groan. We own it, and we move on. We’ve done that through Covid, through the unrest, and we’ve done it through the load-shedding and fuel and the ports. We just carry on.”

Climate change

But it has affected the investment climate in the country. “We’ve fallen out of favour as an investment destination. I met with one of the very large funds in Boston and to my shock, the person said to me out of the whole region [Europe, Middle East and Africa], South Africa in his mandate and profile is equal to 3%. And within the 3% there sits Shoprite somewhere. He says to me: ‘Technically I shouldn’t even be speaking to you ... you’re so small in my life you don’t warrant my time.’ And that unfortunately was a bit of a reality shock.”

Says Abraham: “If one gets dragged into a negative mood, it sure feels like the South African market and South African retail is uninvestable based on the current dire situation and outlook — a classic example of a value trap.”

The difficulty of doing business in South Africa is also playing out in manufacturing, where companies aren’t investing capital to expand their capacity.

It’s a huge concern for the group. Shoprite prides itself on having had in-stock levels of 98% across stores for three years — an industry-leading figure. But with manufacturers not investing in capacity, the group faces a crisis of supply, which means increased investment in the distribution and storage of goods.

Imagine, Engelbrecht says, what kind of stock you need to carry — and what replenishment systems you need in place — to carry 98% stock “when you only get half of what your requirement is”.

“I’m talking about a page-long list of suppliers that delivered less than 50% of what our demand was in December,” he says. Cape Town, for example, has no toilet paper manufacturer, so everything is transported into the region. “That’s an example where a clear opportunity exists and there’s very little appetite for it.” 

The issue, he says, is a simple lack of investment in manufacturing capacity.

“I have been preaching, asking, basically begging for the past eight years to say that we need some investment in production capacity because we can’t every time that there’s something — a stone being rolled in our way — we can’t put up the prices. Because that’s what happens,” he says.

“The only way the manufacturer has to reduce their costs is to increase their volume and therefore get the unit cost down. If you’re at the end of that line and all of a sudden you don’t have water and you have to put up your own plant for it, you’re spending money that will have no return because you can’t convert that into output.”

To mitigate the issue, Shoprite has tried to finance small manufacturers, but the appetite simply isn’t there. “They don’t want the money because they don’t want to take on more risk, because somehow they have to pay the capital back — it doesn’t matter how good the terms are,” he says.

Private affair

Shoprite makes up shortfalls to some extent with some of its private labels, many of which have become national brands. “Three years ago we had nearly 23 private label brands that were worth more than R100-million in revenue in a year,” Engelbrecht says. “Now we have 25 brands that are worth more than R100-million in six months.”

Imports comprise just a small proportion of the group’s products; they aren’t a solution in any case, because of cost plus South Africa’s ports crisis.

The company could open more of its own manufacturing plants. It’s not something on the cards right now, Engelbrecht says, but he doesn’t rule it out. 

“At some point you will be forced to look at more vertical integration into the supply chain. For example, we do have our own feedlot because we can’t get enough meat. When we go on promotion we don’t have enough fresh meat at such short notice. We’ve also got the meat factory that does processed meat.”

Amid such issues, what does Engelbrecht consider his greatest success? “To be able to mobilise such a big team to single-mindedly focus and execute”, he says.

“I think the good leader gets the best out of everybody by making sure everybody understands what we need to deliver. And the combined effort of that is what gives Shoprite this fantastic performance financially and also in terms of delivering for the consumer and the planet.”

Watkins is likely to agree. As far as he’s concerned, Engelbrecht is one of the most accomplished CEOs on the JSE. “The JSE isn’t blessed with a huge number of highly competent, experienced CEOs any more,” he says. “If anything, I feel that every year that goes by the JSE has fewer entrepreneurial and talented CEOs, but I would consider Engelbrecht one of the best.”