President Cyril Ramaphosa had barely finished his state of the nation address (Sona) when stage 6 load-shedding came back into our lives.
It’s about time they changed the name to stage of the nation instead. After several weeks of limited load-shedding, those with solar on their roofs went back to having a smug grin every few hours or so.
Every industry in South Africa is affected by load-shedding to some extent. Grocery retailers are among the hardest hit, because their supply chain costs go through the roof in trying to maintain a cold chain. Fresh in-store produce is at risk, as are frozen products. Every time the generator or backup power system in a mall fails, the resident grocery retailers have to throw away a small fortune in food.
None of this does any favours for food inflation, so consumers are hit by increasing costs plus the pressures of load-shedding on their other expenses and even sources of income. This is a snowball effect that puts immense pressure on consumer spending, which results in baskets with more bread and less butter than before. This is bad news for gross margin at retailers, because staple categories carry a far lower gross margin than more discretionary items.
Speaking of gross margin, the food wastage from load-shedding is a difficult pill to swallow in categories such as fresh. This pales in comparison to the impact on operating margin though, with diesel costs going through the roof. Large landlords have been making comments recently about initiatives to recover more of the energy costs from tenants, so the situation is probably going to get even trickier for grocery retailers.
This is a perfect storm, really. Theoretically the most defensive retail class is under arguably the most pressure. The economic profitability of perishable items takes a real knock under these circumstances, yet grocery retailers have no choice but to be strong in these areas to attract consumers. And in case you haven’t noticed, most new grocery stores are quite small and focused on convenience, so there aren’t endless aisles of non-food products to make up for it. How far we’ve come from the days of hypermarkets and electricity.
When a sector is under tremendous pressure, the winners don’t get what they deserve and the losers get exactly what they deserve.
Despite objectively doing everything right in recent years, Shoprite’s share price is up by only 60% over the past five years. Sure, that’s a better return than the top 40 on the JSE with 38% over the same period, but Bidcorp has managed a 53% share price return over that period by finding a way to do well offshore. Bidcorp is a good business in the food service space, but few would argue that it has dominated a market in the way that Shoprite has put together a masterclass in South Africa. Despite this, the share price returns aren’t exactly worlds apart.
If the grocery market had strong tailwinds, such as improved consumer spending or even the existence of a decent electricity supply, the Shoprite share price return would probably be materially higher. It speaks volumes for the quality of Shoprite’s performance that the company has swum upstream and still beaten the local index. Perhaps that says something about the local index as well.
Retail turnarounds are notoriously difficult. They are even harder when the world seems to be against you
Shoprite’s gain is firmly Pick n Pay’s pain, with the embattled retailer having watched 60% of its value evaporate in the past five years. This is a great example of an Ernest Hemingway “gradually, then suddenly” situation, as the share price is down 45% in just the past year. If comments on social media are anything to go by (and they usually are), then the chickens of years of poor execution on the things that customers care most about have all come home to roost. Aside from the bright spot of Pick n Pay Clothing (and it says a lot that this isn’t even a grocery format), there’s little to feel excited about at Pick n Pay. The group has been squeezed by Shoprite and will need to claw its way back from a dangerous situation against a backdrop of extremely difficult operating conditions. (See Pick of the Month on page 5.)
Retail turnarounds are notoriously difficult. They are even harder when the world seems to be against you. The market wants to believe in this one, with Pick n Pay featuring strongly in Twitter/X stock picking competitions for 2024. More important than that, the share price is up 28% from the lows of December last year. That’s a spectacular return for those who punted at the stock when nobody else would touch it. It’s just important to distinguish between sentiment trading and a genuine long-term view on a turnaround. For now, Pick n Pay’s share price even managed to shrug off the post-Sona load-shedding, so it seems that sentiment has shifted strongly from winter into Summers.
Another five-year disaster is Spar Group, which has suffered a 40%-off special on the share price over that period. Like Pick n Pay, there have been major management changes to try to rectify the disaster. Unlike Pick n Pay, many of the issues have been related to regional exposure problems rather than a core customer resonance horror story.
Where Spar differs substantially from its JSE-listed peer group is that this is a wholesale model rather than a retail model. Spar’s business is built around servicing franchise owners, which is why your local Spar can vary from a small convenience store to a full-blown masterclass in grocery retailing that can rival even the best Checkers stores. It all depends on the strategy that the franchisee followed in the area. This makes Spar interesting and gives it a real neighbourhood feel that, historically, worked for consumers. It has also made it practically impossible to meaningfully compete with Checkers Sixty60, because Shoprite was able to mobilise a corporate store footprint in building the online delivery business and Spar was left floundering with a fragmented collection of franchisees.
To be fair to Spar, rivals Pick n Pay and Woolworths Food were also caught napping by Checkers. It’s debatable whether either Pick n Pay ASAP! or Woolies Dash will ever catch up to the army of turquoise scooters. As for SPAR2U, the less said the better.
The good news for Spar is that the core business in South Africa has seen its fortunes improve as people have returned to work. Turnover growth is still nowhere close to what Shoprite is achieving, with issues like the enterprise resource planning implementation disaster not helping Spar’s case at all. Improvement at Spar will rely on an efficient exit of the business in Poland and no more own goals being scored in the Southern Africa business. If they can get that right and return to paying a dividend sooner rather than later, the market will reward the new management team.
The pick in this sector? The buy-and-forget stalwart is Shoprite, and it still has the opportunity to win plenty of market share
The final chapter in this story is Woolworths, which has seen Shoprite eat its lunch (literally) with growth in Checkers. The most telling statistic at Woolworths is to compare price increases at Woolworths Food with the prevailing level of food inflation. Gone are the days when Woolies could increase prices ahead of inflation, with legions of adoring shoppers willing to pay just about anything for the business-class experience that Woolworths Food offers. Today, the group has to be far more cognisant of Checkers and its appeal to higher-income consumers who are looking to save money on groceries in light of numerous other pressures on the budget, such as interest rates and private school fees.
Thanks to the growing popularity of on-demand shopping, there are also plenty of households that can easily pick and choose their groceries from Woolworths and Checkers without even leaving the couch. This makes it harder for Woolworths to maximise margin on basic items, as shoppers can so easily get those items elsewhere. At this stage, it feels like Woolworths still has the better of Checkers when it comes to the cold chain and the quality of fresh produce. If this situation changes, then all bets are off for how this score will be settled. One thing is for sure: if Woolworths was able to increase prices at or above inflation, then it would. Explanations about prioritising volumes above margins fall flat when a business is a premium offering.
For the past couple of years, the market hasn’t paid as much attention to Woolworths Food as it used to. This is because the recovery in fashion, beauty and home (FBH) was driving the Woolworths share price, along with the end of the David Jones headache. With the FBH story having suffered a considerable wobbly in the latest numbers, Woolworths Food needs to deliver — and not just on Dash.
The pick in this sector? The buy-and-forget stalwart is Shoprite, and it still has the opportunity to win plenty of market share. If you’re looking for a low-stress way to have exposure to this sector, then Shoprite has the most resilient model and is quite capable of delivering growth. You pay for it, naturally, with a p:e of 22.5.
The short-term punt is Pick n Pay, with momentum behind what recalled CEO Sean Summers is doing and some institutional activity to back it up. Just be careful around the timing of results releases, as Pick n Pay is by no means out of the woods and the market doesn’t like to be reminded of tough numbers.
A more measured punt is Spar, though it will require considerable patience. Rather than the juicy jumps we’ve seen at Pick n Pay, Spar’s recovery will probably be slow and steady until the company can pay dividends again. The disposal of the business in Poland would be another likely catalyst for a jump.
Woolworths isn’t a pure-play grocery view, so buying that stock requires a strong view on the FBH business as well. The share price has run out of puff and it’s unlikely that Woolworths Food would be much of a positive catalyst here. South Africans seem to be getting poorer each year and Woolworths is on the wrong side of that trend.
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