Different strokes for different value retailers

South Africa’s two biggest value retailers are both looking beyond their borders for growth, but they are going about it in different ways — and the market is watching both with some unease.

The logic is clear enough. GDP growth has been weak for years, capping the scope for domestic top-line growth, and further local consolidation would likely draw the attention of competition authorities. But investors remain wary of South African retailers’ patchy offshore record, and Mr Price’s recent move into Europe is a fresh reminder why.

For years, Mr Price ran a simple cash-generative, debt-free business focused squarely on the local market — cash has long accounted for at least 88.2% of sales — and investors liked it that way. That changed when it acquired German discount chain NKD in December 2025 for roughly R9.7bn, about a fifth of its market capitalisation at the time and one of the largest offshore acquisitions yet undertaken by a South African apparel retailer. The deal also brought debt onto the balance sheet for the first time.

NKD operates more than 2,000 stores across Central and Eastern Europe. Mr Price argues that Europe’s retail market is roughly 17 times the size of South Africa’s, and that discount is outgrowing apparel more broadly. But investors have balked at the price tag.

The risks of a Durban-based group overseeing a 2,000-store operation in unfamiliar markets with higher labour costs and stricter regulations led to scepticism that triggered a sharp sell-off in Mr Price shares.

However, CEO Mark Blair says the group will provide strategic input and oversight and add value where it has expertise and sees opportunity. And he points out that the NKD management can now engage with a retailer rather than a private equity firm.

The group’s share price jumped 14% on results in June as it disclosed a summary of the 2025 NKD financials, which outlined market share gains, gross profit margin expansion and a 40% increase in operating profit, all signalling good trading momentum.

It is worth noting that the group’s top 10 shareholders have remained largely unchanged since the announcement of the acquisition. Mr Price has also been expanding locally, with the purchase of Power Fashion, Yuppiechef and Studio 88 delivering R1.4bn in operating profit in the 2026 financial year.

For the 52 weeks to March 28 2026, Mr Price reported a resilient performance, with revenue increasing 4.2% to R42.7bn and retail sales rising 4.3% to R41.1bn. Gross profit margin expanded by 70 basis points to 41.2%, and normalised headline earnings per share (HEPS) grew 8% to R14.89. The group is still gaining market share, and management highlighted the strength of its fashion-value positioning and disciplined execution.

Pepkor has taken a different route. Rather than buying a large, established platform overseas, it bought Grupo Avenida, which was much smaller than the local retailer and a relatively low-risk wager, at less than 4% of market capitalisation.

It hasn’t been plain sailing. Pepkor is behind on its original Avenida rollout plans, having run into logistical problems and merchandise challenges. But performance in Avenida recovered strongly in its recent reporting period, with sales up 16.4% and like-for-like sales growth up 10.3% in constant currency terms.

Pepkor — which owns South African chains Ackermans, Pep and Tekkie Town — continues to expand locally and plans to open 200 new stores in the 2026 financial year.

It now plans to open 600 stores, with the potential of more than 1,000, in Brazil over five to seven years — nearly double its original target. Avenida’s contribution to group revenue has risen to 5.5% from 4.4% a year earlier.

It wouldn’t be the first time Pepkor has made offshore expansion work. The group, the largest retailer in South Africa by store count, has previously expanded into Sub-Saharan Africa and, more significantly, built Pepco into one of the fastest-growing discount retailers in Poland, Hungary, Romania and the Czech Republic.

Pepco has its roots inside Pepkor (it traded as Pepkor Europe until 2019) and came under Steinhoff’s full ownership in 2015; Steinhoff’s collapse forced a gradual reduction of that stake, leaving Pepco as a separately listed business.

The two are now comparable in size despite operating in very different economies: Pepkor’s market cap is about R80bn against Pepco’s R87bn (depending on exchange rates). Some analysts have argued that it might once have made sense for Pepkor to buy Pepco outright, but that window may have closed.

Pepkor has, if anything, been growing faster of late, posting stronger revenue, profit and earnings growth over the past 12 to 18 months. It was helped by market share gains at Pep and Ackermans; rapid growth in fintech and cellular services; bolt-on deals of Legit, Swagga, Style and Boardmans (which it bought from Retailability); and the purchase of Shoprite’s furniture division (non-RSA).

The group increasingly looks less like a pure retailer than a distribution, fintech and low-income consumer platform — capabilities that may prove more transferable offshore than Mr Price’s model, which leans more heavily on merchandise appeal, brand strength and sourcing power.

Pepco has spent much of the past two years extracting itself from its troubled Poundland business. Despite its much smaller home economy, Pepkor generated R95.3bn in revenue last year — more than Pepco’s comparable figures in euros.

Pepkor’s interim results for the six months to March 31, released in May, underline the resilience of its value-focused model. Revenue rose 13.2% to R54.8bn, normalised HEPS grew 12.1% and operating profit climbed 9.4% to R6.3bn. The group expanded its footprint to 6,657 stores across nine African countries and Brazil, with strong momentum in financial services and informal market trade. Ackermans’ like-for-like sales declined 0.5%.

South African retailers have spent decades learning how to sell a R99 school shoe to a family earning R4,000 a month in a country with high unemployment

There’s a broader theme here. The long-standing assumption has been that retail sophistication flows north to south — that the likes of Zara, H&M and Cotton On would come to dominate local markets. And they have been successful. But South African retailers have spent decades learning how to sell a R99 school shoe to a family earning R4,000 a month in a country with high unemployment. That expertise in serving price-conscious consumers — built into supply chains, credit systems, merchandise mixes and store formats — may turn out to be an exportable asset.

At Pepkor’s capital markets day in March, CEO Pieter Erasmus repeatedly stressed the “scalability and replicability” of its low-cost retail, financial services and informal market model — suggesting that the group believes its core capabilities can travel well beyond South Africa.

That said, no active transaction or acquisition process is under way for international expansion, says a Pepkor spokesperson. “We are mindful that any international expansion opportunity would need to meet stringent strategic, operational and financial criteria and offer a compelling return for shareholders.”

Analysts are cautious. Anchor Capital investment analyst Steph Erasmus says Pepkor has tempered its earlier talk of international expansion. “I wouldn’t expect anything of the scale of the Mr Price deal — that’s probably one reason management has become more cautious about how it talks of offshore opportunities.”

It’s understandable, he says, that South African retailers look abroad once local growth options narrow, but history shows that expansion often disappoints. “Either the acquirer overpays or management assumes that a South African formula can simply be copied and pasted into another market.”

He says value retail should travel better than fashion, arguing that the more generic the proposition, the easier it is to replicate elsewhere.

Gryphon Asset Management portfolio manager Casparus Treurnicht says South African retail has enjoyed a 25-year boom, of which the main drivers are now fading, though a new commodity cycle could lift consumer disposable income. He’s sceptical about the going-offshore thesis more broadly, noting it’s mainly the higher-end fashion retailers that have come back “with their tails between their legs”. He prefers Pepkor’s low-key organic approach in Brazil to deals in which mature businesses are bought outright. “A seller always knows more than the buyer — that’s why the market is so uncomfortable with the Mr Price acquisition of NKD.”

There have been many failures, he says. And with local consumers under pressure, retailers should be strengthening their balance sheets, not expanding and leveraging them, he argues.

Alec Abraham, senior equity analyst at Otto1890, says both groups have gone offshore because domestic growth keeps disappointing, being a “green shoots” story that never quite translates into the consumer wealth needed to sustain spending. This is compounded by the fact that, as listed companies, they face shareholders who expect perpetual growth, he adds.

Both have covered all their bases locally too, pushing into adjacent categories such as homeware and beauty and non-adjacent ones such as telecoms and financial services. Whether value retail travels better than fashion depends on the deal and the market, he says. TFG’s UK and Australia exposure compensated for a weak South African performance until those markets hit their own cost of living crises and consumers there came under pressure too.

In Abraham’s view, failed offshore deals tend to share the same ingredients: a shifting operating environment; deal-specific risk (such as whether a target is in a turnaround situation or already profitable); and management hubris or execution risk.

Abraham adds that heavily indebted deals compound that risk if conditions move against the original assumptions. “Sometimes the best strategy is simply to run your existing business as effectively as possible until conditions improve or force growth opportunities. But growth-hungry shareholders often aren’t happy with that approach.”