It’s hard to overstate just how good Shoprite’s profit margins are. Not only is 6.1% more than double that of Pick n Pay or Spar, it comfortably bests world leaders like US retailers Walmart (3.3%) and Kroger (1.95%) and even private German powerhouse Aldi (3.9%). Results for the year ended June show a 21% jump in trading profit, to R10.3bn, as shoppers spent more on their baskets, even as they visited stores less frequently. The FM spoke to CEO Pieter Engelbrecht.
Can you sustain these margins?
PE: First, what makes that number so great is that I can still say to you unambiguously that Shoprite is the lowest-priced supermarket in SA. We are price mad and we will not be beaten on price. That margin comes from efficiencies, from running a very tight ship, and my standard answer is that I think we can maintain that.
Does that make you a takeover target? Or has that ship sailed past SA?
PE: What I’ve found lately is that a lot of the international retailers are retreating to their home markets. It’s becoming increasingly difficult to trade in foreign markets because of a global change — [partly] from governments promoting "buy local", and [supporting] local business.
Bloomberg Intelligence suggests that you need to rebuild your non-SA margins to justify continued capital spend there. Do you agree?
PE: We already changed our operating model quite significantly in terms of local sourcing and that has had quite an effect. We were able to increase profitability fourfold to R307m, [within] the short-term target we set of R300m-R500m, with a lot of efficiencies, improvement on things like shrinkage and wastage, and I think it’s a sustainable result with the 10 countries that remain in that segment.
Shoprite has spent R800m buying back shares — will that continue, because it does suggest a shortage of opportunities for your capital?
PE: We were mandated at the mid-R150s for a buyback, so I think the price is now a bit expensive, but that still remains one of the items we will explore, looking at our cash position.
Having said that, you talk about a "plethora" of opportunities. You’ve just bought some businesses from Massmart, including Masscash and Cambridge Food. What else can you do?
PE: It’s the Massmart acquisition [and] there are some other acquisitions we’re exploring, both of a physical nature as well as digital. Then there’s the whole momentum we have on the digital [side] of the business and better use of marketing spend we can achieve, plus the 133 new stores we want to open. Masscash will add about R10bn of revenue — it’s right up our alley — and then I don’t see the end of market share growth, especially in the Checkers brand. Checkers on its own commands less than 15% market share and I believe there’s still headroom to grow.
Why will Masscash and Cambridge succeed in Shoprite if they didn’t in Massmart?
PE: Well, food retail is what we do: our supply chain is geared to that, our way of pricing, how we market, how we run our various divisions. Until recently, the Mass business was not in food at all, apart from Makro. It will integrate very easily within our structures.
The riots in July damaged 231 of your stores. What was going through your head when it played out? How much damage do you feel it has done to SA?
PE: It’s going to take us a decade to recover. When those trucks were burnt on that Friday night, I immediately knew that trouble was coming. We had our first ops meeting on that Sunday at 4am and come first light on Monday, we had choppers in the air. I probably didn’t sleep more than an hour at a stretch for two weeks. We were running flat out to try to protect our assets; fortunately, we did not lose one of our distribution centres and [that] allowed us to recover much quicker. It was incredible, the level of execution from the Shoprite team in being able to reopen a completely destroyed store in six days. I spent quite a few hours in those choppers myself, and I estimated the loss at R50bn, what I saw with my eyes. I can’t say it’s not going to happen again, but I think the country will be better prepared.
Are you fearful of a skills exodus, which becomes especially acute when you’re throwing a lot at developing the digital side?
PE: Ja, I am concerned about it. People like Amazon in the UK offer £1,000 just as a joining fee, everybody’s running almost for the same talent and some of these software installers that I worked with recently said the tech talent in SA is of the best in the world.
Checkers Sixty60 saw 1.5-million downloads this year. Is this ahead of where you hoped you’d be with it?
PE: Originally I just asked for two things: first, everything must be about the customer experience; and second, I wanted to make money out of it, it’s not a charity business.
They’ve achieved both, which I’m very happy with. I think we’re further than where we thought we’d be, and every time we hit another Covid wave, like the third wave now, we’ve seen record numbers there. Sometimes it’s difficult to deliver on demands, we’re adding more capacity, speed et cetera, but I think we’re ahead because of Covid.
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