Remarkably, for a business that isn’t doing too well, in the past two years Choppies South Africa has been approached by all three big grocery chains about putting together some sort of deal.
Perhaps it was the sense of fragility that enticed them. Less remarkable is that while Spar and Pick n Pay weren’t sufficiently impressed with what they saw, South Africa’s big retail gorilla seems to think there’s potential. Having talked and walked away twice, Shoprite has apparently returned a third time and is close to inking a deal with the previously Botswana-owned retailer.
In 2020 the Botswana holding company Choppies sold loss-making Choppies South Africa for R1 to little-known private company Kind Investments. The purchase involved a commitment that Kind Investments would inject R100m into the business.
According to the Competition Commission, which approved the transaction, Kind Investments is “ultimately majority owned and controlled by a historically disadvantaged individual”. The commission did not disclose the name of the individual. The FM was unable to make contact with Kind Investments.
At the time, Choppies South Africa had 93 retail outlets across the country, except for the Western Cape. The commission approved the transaction on the grounds that it would not affect competition and did not raise public interest concerns. “The commission found that Choppies South Africa is in financial distress and absent the merger is likely to cease trading, resulting in a total loss of employment,” it said in March 2020.
The Shoprite Group does not comment on speculations. If information on business acquisition and ventures becomes available, it will be shared with the market accordingly
Shoprite will not comment on industry speculation that it’s involved in some form of transaction with Choppies South Africa. “The Shoprite Group does not comment on speculations. If information on business acquisition and ventures becomes available, it will be shared with the market accordingly,” said the media team in response to a list of questions from the FM.
When it released its interim results in March, the group said that despite just bedding down the acquisition of 94 Cambridge Food and Rhino Cash & Carry stores from Massmart, it was keen to continue expanding in South Africa. The retailer planned to open 238 new stores in the six months to end-June, bringing the number of new stores in financial 2023 to 512.
An industry source tells the FM that only Shoprite has the capacity to turn Choppies South Africa to account. “Shoprite has made a decision to grow aggressively in South Africa. As well as opening new stores, it’s buying out independent stores such as President Hyper and establishing new formats.”
This view is shared by independent retail analyst Syd Vianello, who says Choppies lost money here because it expanded too far and too wide from its base. “It had to send a delivery truck long distances to service just one store; it didn’t make sense.”
But he argues Shoprite should only take over Choppies South Africa stores where there won’t be cannibalisation and should keep the name where it has brand value, as it did with President Hyper.
Given the relative size of a deal, it’s unlikely Shoprite has any obligation to issue a Sens statement to its shareholders. The largest grocery retailer in Africa has 2, 617 corporate stores and 535 franchise outlets, so the acquisition of 93 outlets would hardly move the dial. And it appears that only 38 stores are in fact being considered.
Even so, a deal could see Shoprite bump up against the competition authorities again, given that the merger notification threshold is annual sales of just R100m. That’s hardly an enticing prospect.
After all, its acquisition of the Massmart stores involved a considerably longer than expected 19 months, with the Competition Commission imposing extensive conditions. What helped overcome the commission’s hurdles was the claim that the portion of the business it was buying was failing, and that if the deal did not go ahead 4,000 jobs would be lost. The Competition Tribunal ordered that there should be no merger-related retrenchments and no store closures.
This time around, it could be that Shoprite is checking out the individual Choppies South Africa stores before it makes any commitment. According to unconfirmed reports, Shoprite’s IT experts have already been giving advice and preparing point-of-sale systems for its small rival. They are also reportedly looking at some form of arm’s-length supply agreement.
Either way, the Competition Act’s notion of “taking control” is wide, and any number of differently structured transactions could trigger a clearance requirement, a competition law expert tells the FM.
“Will Shoprite have a management agreement with Choppies South Africa? Will it be procuring supplies on its behalf? What will happen to competition between Shoprite and Choppies South Africa stores? These are all factors the competition authorities will consider,” says the lawyer.
Given the commission’s evident worries about food prices — check out its latest report — any sort of deal will not escape scrutiny.
But while the growing dominance of one player may be a worry, that concern needs to be balanced against the benefits of rescuing a failing operator.
* Update: The FM contacted Choppies Botswana for comment before this article was published. The company did not provide comment before publication but following publication asked the FM to clarify that Choppies South Africa has to return the intellectual property rights (including the use of the brand name) to Choppies Botswana by April 30 2023.
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