Grabbing a quick coffee is how you might describe one of Shoprite’s latest purchases. That’s because the nation’s largest retailer can pay for Vida e Caffe, the lively red chain of more than 400 coffee shops, with a morning’s takings at the till.
The other of “the two small” deals, in CEO Pieter Engelbrecht’s telling, is R&A Cellular, a device rental and merchant platform which will form part of the group’s larger financial services ambitions.
And with merchandise sales reaching nearly R271bn for the 52 weeks ending 28 June (a 7.2% jump on the previous year), what the retailer is paying seems like a drop in an Americano cup.
But these are the big, small punts a business with seemingly unshakeable momentum can take. And Shoprite Holdings certainly has momentum — it has just clocked its 89th consecutive month of market share gains, Engelbrecht told investors.
More importantly, the company has managed to widen its gross profit margin to 24.5%, from 24.3% a year ago, and its trading margin to 6%, from 5.9%. As Engelbrecht points out, both grew faster than sales.
This, he says, “shows the margin was exceptionally well managed, and so were the costs — hence the 12.2% growth in diluted headline earnings.” The market initially loved the story, pushing Shoprite shares over 3% higher; the stock slipped back however to close only 1.2% up on Tuesday.
Zero to R25bn
Still, the sheer scale of its growth is undeniably impressive. Checkers was again a standout success, growing sales by 10% the past year, some five times faster than the rest of the South African market. Over the past decade the brand’s sales have rocketed from R37bn to R105bn. And its store footprint is now 662, which includes 342 supermarkets, 40 hypers, and 352 liquor stores. Another 26 grocery stores and 31 liquor outlets are set to open in the current year. The growth of delivery superstar Checkers Sixty60 “slowed” to 34.7%, but now accounts for sales of more than R25bn. That is up from, well, zero in just six years.
Recipes by Jamie Oliver in your Sixty60 bag tell you that Checkers obviously targets a more well-to-do customer than the original Shoprite brand. Hooking more affluent consumers has surely given profit margins a boost. And Engelbrecht’s team has cleverly done this by developing more than 600 premium private label products. Just think of the Forage Feast series endorsed by Michelin star chef Jan Hendrik van der Westhuizen.
So, it’s not hard to imagine flogging a Vida cortado, or a million or two of them, to this market.
But Engelbrecht sees the caffeine fix as having an even wider appeal. He is keen to consolidate the group’s coffee holdings under Vida and use it as an opportunity for franchise-holders – that means OK Foods – to capture more value.
This promises plenty of crimson takeaway cups in shoppers’ hands. But the other red brand in the stable, compared to competitors at least, can hardly be called a drag on the group. The Shoprite segment, which includes not only the no-frills stores of the same name, but also Shoprite Liquor, Shoprite Sixty60, Shoprite Cash and Carry, and USave, increased sales by a more modest 4.3% to almost R122bn.
This, however, is no mean feat as the group experienced overall price deflation in this segment. That, of course, means only one thing. To grow sales, Shoprite needed to grow volumes. And they did.
Refining the data
The group managed to achieve superior volume growth to peers, Merchant West Investment portfolio manager Izak van Niekerk points out. “And this was with their selling price inflation tracking well below official/headline food price inflation.”
Engelbrecht puts it down to years of refining the business’s data toolkit.
“In 2017 we laid the platform, and then we started building tools on top of it – one of which is the price optimisation model, which uses artificial intelligence, among other things.”
It helps the business with product selection and price points and it hones in on the right relationship between price point and volume, he adds. The brains in Brackenfell also have a model for price personalisation, which could offer specials at an individual level. Together these tech tools have helped boost sales even as price inflation hovers around a seven year low.
“For example, if you discount a product by 20%, it doesn’t mean volume grows by 20% – it might be more, or it might be less,” says Engelbrecht.
Either fascinating or scary, depending on the shade you display on the techno-optimism-pessimism spectrum.
Van Niekerk, for one, finds it fascinating.
“An interesting item they mentioned as the power of their data, is around the fuel price swings we have had this year, that they could calculate it down to what the effect would be by item and then make decisions around that,” says Van Niekerk.
Out of Engelbrecht’s control, though, is administered prices — the likes of water, electricity, and property rates. When he started 30 years ago, these represented less than 1% of costs; now they are at 2.3%.
“And for a retailer, that additional 1.5% or so is an enormous amount of money on a sales value of R270bn,” he points out.
Enough to buy plenty of coffee chains.