Retail continues to capture the hearts and minds of investors, despite its poor performance in the local market in recent years. Broad exposure is tough here, but stock-picking can be a lucrative strategy and that is surely part of the appeal.
Another part of the appeal must be the familiarity that investors have with the brands. Investing certainly isn’t the Loeries, with many reasons for success or failure that go far beyond how good the advertising is. If it was as simple as buying the best brands in the world all the time, all you would need is a brand awards results sheet to make your portfolio allocations.
This isn’t to say that brand isn’t important. Many of the best brands in the world have been winners when viewed with a long-term lens. In a buy-and-forget strategy, you’re a lot better off buying Nike rather than Foot Locker, or PepsiCo rather than a random retail chain that has limited prospects but at least has a modest valuation. Then again, remember BlackBerry, Kodak and Tupperware. A great brand can’t be saved by a broken business model.
Valuation is always important and even more so with a shorter-term lens, as there is less time available to make up for a bad entry point. Strategies such as dollar cost averaging tend to work pretty well with great companies, as you’re consistently putting your money behind the best products and management teams in the world. If you have a shorter time horizon, then relative valuation becomes almost more important than the underlying business.
Within this interesting sector, there are many ways to play. IM could fill an entire book discussing the full value chain from fast-moving consumer goods manufacturers through to retailers. Investors could look at true luxury groups such as LVMH and Richemont at one end of the spectrum, right through to a retailer such as Dollar Tree in the US at the other.
Or they could take a much narrower look at a battle playing out in the local market that has captured the imagination of investors and consumers alike.
With Pick n Pay practically left for dead and Spar dealing with leadership and business challenges both in South Africa and in the European businesses (particularly Poland), Shoprite and Woolworths have been slugging it out for top honours in the high-LSM segment. To be fair to Pick n Pay, there are individual stores that are on par with or even better than anything else out there, like the flagship in Constantia. These are few and far between though, so a quick survey should reveal that Pick n Pay isn’t seen as a premium grocery destination like Woolworths Food or Checkers.
The best way to think about the Shoprite group is as a combination of Apple and Android. There’s something for every price point, ranging from Checkers at the top end through to Usave for lower-income earners
The best way to think about the Shoprite group is as a combination of Apple and Android. There’s something for every price point, ranging from Checkers at the top end through to Usave for lower-income earners. In understanding how a single group can do such a great job of resonating with every type of customer, we need to work through some retail theory and understand how different strategies are needed for different points on the LSM curve. By delivering each of those strategies to a high standard, a retail group can achieve success with various different formats.
Let’s start with the low-LSM model. At an extreme, we find “hard discounters” that have a limited assortment of products. In other words, there isn’t much choice on the shelf. This makes it easier to push higher volumes with less variety, driving streamlined operations and creating more negotiating power with suppliers around volume rebates.
Private label is usually a big part of the strategy as well, with customers caring about price far more than brand. After all, many of the private-label products are now as good as the branded products, often being produced in the same facility. A further benefit of private label is that the retailer has even more control over the supply chain.
The poster child for this strategy internationally is Aldi, launched in Germany in the 1960s. Lidl is also a German discount chain, with both of these businesses having expanded internationally. In the local market, Usave within Shoprite and Boxer within Pick n Pay are the closest things we have to hard discounters. Boxer is more of a soft discounter, offering an arguably more pleasant in-store experience and more variety. This has been reflected in the success of that business in recent years.
Moving up the LSM curve, customers start to value different things. It’s not just about price any more, though practically every consumer has price as a major factor. The difference for hard and soft discounters is that price is literally the difference between customers eating or not. The plight of these consumers is something that the average Woolies shopper cannot begin to truly understand.
Assortment is key here, as higher-income shoppers demand a greater selection. Sure, they need a loaf of bread. They also want parmesan cheese for the pasta that evening, or perhaps psyllium husks for a low-carb recipe that they want to try. Don’t forget as many vegan alternatives as possible, or at least lactose-free diary for those with sensitive stomachs. The classic saying of “First World problems” is the best way to think about the assortment.
The supply chain is vastly more complicated than in a hard discounter, featuring numerous suppliers and a greater mix of fresh and time-sensitive perishables. Getting your stock levels right on baked beans is far easier than figuring out how many strawberries you need, with fresh produce wastage a significant drag on gross margin.
A greater assortment means less volume in each product compared with what a hard discounter can achieve. This means that supplier rebates in basic goods aren’t necessarily as lucrative, so a greater proportion of gross margin needs to come from price rather than supplier rebates. This is a big part of why a discounter can be cheaper on the basics than a grocery store with a wider assortment, attracting shoppers who are literally counting every cent.
The typical mid- to high-LSM strategy is what your local grocery store probably looks like, with a solid assortment across various product categories. Woolworths Food gets included in that grouping these days, as it has been forced by Shoprite to become more price competitive in core lines. Anecdotally and based on conversations with peers, Woolworths still has its nose ahead of Checkers when it comes to product quality, helped by the best cold chain in the business.
But with economic challenges everywhere you look, even high-LSM shoppers want better value and Checkers has happily filled that gap, with Woolworths Food scrambling to catch up by implementing below-inflation pricing increases in many products.
A more recent angle to mid- to high-LSM shopping is on-demand delivery, catering to busy families who will happily pay a delivery fee to save the time, hassle and cost of going to the local retail centre
A more recent angle to mid- to high-LSM shopping is on-demand delivery, catering to busy families who will happily pay a delivery fee to save the time, hassle and cost of going to the local retail centre. Checkers stole the show here, with Sixty60 cementing the turquoise-coloured scooters in the local business landscape. Pick n Pay’s ASAP and Woolies’s Dash are putting up a fight, but this is a case where first-mover advantage was substantial. Sixty60 is consistently excellent and has won plenty of consumer goodwill, with every scooter doubling up as a mobile billboard for Checkers.
Finally, investors reach the top of the LSM food chain, with stores designed for the wealthiest shoppers. There are a handful of these stores in major metros across the country. Remember that “wealthy” in this context doesn’t mean a Porsche in the driveway. It means shopping for fresh sushi, along with a smoothie or Starbucks coffee while browsing. Compared with the struggles of the average Boxer or Usave shopper, this is billionaire-level stuff.
To create a halo effect, Checkers revamped selected stores into the new FreshX format. This process first hit the headlines in 2021, giving Woolworths CEO Roy Bagattini something to chew on after taking over from Ian Moir in 2020. Moir’s gift to Bagattini was a weakened, confused Woolworths that was focused on trying not to let Australia sink the entire group. This was the opportunity Checkers needed to move upmarket, hitting Woolworths right in its core customer base.
Woolworths is getting a lot of things right under new management, especially in the fashion, beauty & home segment that had lost its way. The food business remains entrenched in the hearts of wealthier South Africans, delivering consistent quality and easily the best service levels in the industry. Shoprite has been winning market share across the board though, including with Checkers in the higher-LSM bracket. Pick n Pay has been the first casualty in the war with the Brackenfell Bruisers. Will Woolworths Food be next, or will Bagattini and crew have the last Chuckle?
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.