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WHAT CAN INVESTORS EXPECT?
Apr 06, 2022
Since the emergence of Covid-19, the periodic restrictions on the liquor trade have certainly given the market leaders – Spar, Pick n Pay, Massmart and Shoprite – a rough ride in terms of sales. In its December 2021 full-year results, Massmart reported a loss of 110 liquor trading days through the year, which translated to a loss of sales amounting to R1.8 billion and a R193 million trading margin loss. Pick n Pay reported a loss of 55 days of liquor trade, which translated to R800 million in sales lost, in its August 2021 half-year results.
Since the lifting of liquor trading bans in September 2021, however, as expected, things have started to look up for the industry. Over the 18-week period ended 29 January 2022, Spar’s liquor sales increased by 55.8% – the company had reported 58 lost liquor trading days over the same period last year. Shoprite also reported a healthy liquor sales increase of 49.8% in its December 2021 half-year results. We expect to see similar results from Pick n Pay and Massmart on these companies’ next reporting dates.
Over the next six months, we’re likely to see a return to more ‘normal’ liquor sales and given that liquor has relatively higher margins than food products, we should see an improvement in the margins across the industry back to pre-Covid-19 levels.
Over the past five years, South Africa has imported more than 30% of its wheat from Ukraine and Russia combined. While we expect to find alternative supplies from elsewhere in the world, this will no doubt come at higher prices, driving up the price of bread in the coming months. Additionally, Ukraine accounts for over half of global sunflower oil exports, while Russia accounts for about 27%. The war has therefore also pushed up sunflower oil prices, adding to pressure on consumers.
As consumers, particularly in lower-income groups, reprioritise spend to compensate for higher staple food and transport prices, we expect retailers to see a shift in the food basket, particularly in terms of discretionary products. Higher-income consumers are somewhat more resilient, which should favour Woolworths in the food space.
There is strong competitive rivalry among food retailers in South Africa, and a key determinant of success is the level of supply-chain efficiency. Shoprite has invested in this for a number of years and consequently generates higher margins than peers.
Shoprite is also reaping the benefits of its IT investment, aided by its strategy to penetrate the affluent market via the Checkers brand. Checkers has 15% market share in this segment and management is targeting 20% over the next three to five years. Shoprite will be investing more to revamp its Checkers stores with the ‘Fresh X’ concept, which offers a full shopping experience with more fresh food and includes coffee shops and wine cellars inside the store.
Checkers Sixty60 (online shopping and delivery) now accounts for 5% of group total sales, and we expect more investment into its catalogue and new features on its app. Shoprite aims to further diversify by opening dedicated pet and baby stores. With the share price up more than 50% over the past 12 months, the market has rewarded the group for consistently beating expectations.
Pick n Pay is doing the opposite of Shoprite by looking to further penetrate the lower end of the market through its Boxer brand. Management plans to double the Boxer store footprint over the next three years. Pick n Pay has been working to improve its own supply chain through centralisation, with Boxer now 65% centralised. The group is building two new distribution centres for Boxer (opening in 2023) and Pick n Pay (opening in 2024) in Gauteng.
In our view, Pick n Pay is on the right path and can compete at the lower end of the market. Its main challenge will come from informal vendors who offer both convenience and price, with their lack of scale countered by these market players not paying tax.
Pick n Pay’s earnings have lagged expectations over recent reporting periods, which may be indicative of slower-than-expected structural change within the group. In our view, this may present investors with an opportunity, as we expect the group to deliver improved growth over the coming years.
In contrast to the central ownership of stores at both Shoprite and Pick n Pay, Spar operates a franchise model. The group has seen pressure in Europe, especially in Poland, where it is relatively new and still loss-making. Spar relies on the individual franchisees buying from the group, the extent of which is known as ‘retailer loyalty’. There is no minimum requirement for this, which incentivises the group to perpetually reinvest and compete with other wholesalers on pricing and efficiency. The key question for Spar is whether it will make a success of its European operations in Ireland, Switzerland and Poland, which are the focus of the group’s expansionary efforts.
In conclusion, looking back over a period of two years, we’ve seen only a slight slump in the share prices of the retailers we’ve discussed, with the exception of Shoprite. In our view, the market is rewarding Shoprite for the way its strong supply chain has enabled the company to cope with the pandemic and the resultant liquor restrictions.
However, we’ve started to see some positive recovery in sales for the rest of the players, and liquor sales should be aided by the easing of restrictions on public gatherings and sporting events as announced by President Cyril Ramaphosa at the last ‘family meeting’. We’ll be keeping a close watch on these companies, and may add selectively to clients’ portfolios should we identify opportunities in this sector.
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