Your favourite food retailers are doing a lot more to get you to open your wallet: think cellphones, pets, baby products and outdoor furniture.
That’s because they all face huge pressure in a market that isn’t growing. Forays into different countries, a popular option a decade ago, have almost universally bombed.
So-called adjacent businesses yield higher margins than pure groceries, which are in low single digits. According to McKinsey, a typical large company generates 20% of revenue outside its core business, and its research shows organisations that expand into natural adjacencies generate, on average, 1.5 percentage points of annual shareholder returns above their industry peers.
The main appeal is the leverage of scale, which enables businesses to sell more items to more people off an existing distribution base, and generally at higher prices.
Market leader Shoprite has been growing this universe for years. It opened its first LiquorShop in 2005 and now has more than 700 across South Africa, Botswana, Mozambique, Lesotho and Namibia. In November 2021 it opened Checkers Little Me — a destination baby store — of which there are now 11.
Its newest foray is Checkers Outdoor, which first opened in Hermanus in April 2022 and sells everything from sleeping bags to tents, camping chairs, braais, heaters and headlamps. Clothing brand UNIQ launched in March last year and has since opened 19 stores.
Pick n Pay, meanwhile, has increased its company-owned clothing footprint by more than 70% over the past five years. And even Woolworths surprised the market with its purchase of Absolute Pets.
“It is doing this because the affluent customer base in South Africa is not growing, limiting growth potential for the core food stores,” says M&G Investments analyst Damon Buss.
It’s been pipped by Shoprite, which already launched Petshop Science early in 2021 and now has 50 dedicated pet stores nationwide. According to 2023 Euromonitor International data, there are 21.7-million pets in South Africa; annual consumer spend on pet food and accessories is estimated at R8bn and expected to grow 2.5% by 2026.
Adjacent businesses are proving especially critical for Pick n Pay now, while CEO Sean Summers attempts to remove the beleaguered grocery rump from intensive care.
Pick n Pay Clothing has been a standout success for the group and Summers says margins in Boxer and clothing “are very healthy”. Pick n Pay recently launched an online homeware store called Pick n Pay Home, selling products not available in its physical retail stores and pitting the group against @home, Mr Price Home and Yuppiechef.
Trade Intelligence senior analyst Nicola Allen says value-added services — including banking, money transfers, insurance and cellular — generate commissions that are a key part of “other income” on corporate financials. Commissions for Shoprite Group were more than R1bn in the 2023 financial year and R1.4bn for Pick n Pay.
Expanding into adjacent areas also helps grocery retailers avoid cannibalising their fast-moving consumer goods (FMCG) sales while leveraging established infrastructure, says Allen.
Buss says adjacent business also helps to improve the competitive position of a supermarket chain’s core business. An example of this is Spar buying Encore, the business that develops and sources its private-label range. “Private-label ranges in food retailers create differentiation in the product available, hence draw customers into the stores. And private-label products generate higher margins than branded goods for the retailer,” he says.
Every time you pay for a private-label product, your supermarket is gleaning more useful data on you too.
For example, Shoprite uses the data to improve the efficiency of its supply chain, ensuring the right quantities of products are ordered and delivered to the right stores. A grocer tracks these volumes to earn rebates from the FMCG producers, enabling it to offer lower pricing to customers.
And “while a food retailer may have maxed out its share of a consumer’s grocery spend, it may not have any share of other categories of spend. Leveraging the consumer’s trust in its brand and the high frequency it engages with a customer enables it to offer completely unrelated services and earn a fee for doing so,” says Buss.
A good example is the money market counters at food retailers, where customers can do everything from paying municipal bills and withdrawing cash to booking event tickets.
Still, cautions Gryphon Asset Management portfolio manager Casparus Treurnicht, it means retailers are now juggling a lot more balls when what they really need is a growing economy. He believes that Shoprite, in particular, is “probably doing too much at the same time”. But this, he says, “we will know only in hindsight”.
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