Shoprite as just released results for the 3 months to September 2019. Supermarket revenues in South Africa rose by 10.3% over the period. Sales outside South Africa fell by 4.9%. CEO Pieter Engelbrecht has told investors Shoprite is actively considering exiting some African markets. We look at which ones he could mean.
Shoprite has two major, and problematic, markets outside South Africa: Nigeria and Angola. For the full year (July 2018-end June 2019) sales fell by 12.2% in Angola. But because of currency devaluation, sales in South African rand fell by 38.4%. In Nigeria, the situation was only marginally better: sales were up by 5.6% but flat in South African Rand. Overall, sales in supermarkets outside South Africa fell by 7.7% in Rand terms.
Since then, a wave of xenophobic attacks on foreigners in South Africa has seen retaliatory attacks and boycotts against South African-owned businesses in other countries – notably Nigeria. Sales in supermarkets outside South Africa fell by 4.9%. Perhaps something else has changed, though, in Nigeria. Shoprite is the most visible South African business in the country, where it has operated for almost fifteen years and is the largest supermarket chain. It has been made to feel unwelcome and targeted.
This might not matter in a normal year, but Shoprite’s share price has fallen by 27% in 2019 and the company has also been dealing with the reputational fallout from the Steinhoff accounting scandal. On a single day in August, when Shoprite revealed that non-SA sales were dragging down earnings, the share price fell by 9.25%. CEO Engelbrecht knows that he does not have unlimited time or investor patience to sort out Shoprite’s weaknesses outside South Africa.
One of the key lessons Shoprite has learnt is to pay closer attention to long term macroeconomics when selecting which markets to enter or expand into – it cannot outrun currency devaluations. For at least the next year, oil prices will be soft. Which means that growth in oil dependent economies like Nigeria and Angola will be soft at best in 2020. Worse, the World Bank forecasts that oil prices will not rise through to 2030 (although other organisations have more bullish forecasts).
Shoprite has exited markets before: It exited Egypt in 2006 after just five years, citing a restrictive market. It exited Zimbabwe in 2013, Tanzania in 2014 and Mauritius in 2018. In 2015 it was close to selling off its stores in Uganda to then Kenyan market leader Nakumatt.
Shoprite won’t exit Nigeria willingly. It is the market leader, with 26 stores in the country, ahead of Artee Group (Spar). But crucially, Shoprite’s footprint across so many cities in Nigeria has been so hard won. In Angola, where Shoprite has 27 stores it is also the market leader. Again, as in Nigeria, Shoprite’s footprint spans multiple cities. This footprint is relatively expensive to service when sales are poor because the network is still small and distribution costs far higher than in South Africa.
In short, the conundrum for Engelbrecht is that these are flagship two markets where Shoprite has worked incredibly hard to build local supply chains and establish dominance. But they risk sucking time, energy and financial resources while oil prices are both unpredictable and low.
What are the alternatives?
There are several lower profile markets where Shoprite could cut its losses with little long term damage. It has just one store in DRC, despite having entered the market in 2012. It has four stores in Uganda, having entered in 2000. It has just nine stores in Madagascar, with limited prospects for growth and no real strategic value to be gained from being there. Shoprite has 17 stores in Mozambique, but this too is an attritional market that has seen retailers close down in recent years. A market, moreover, that would be relatively simple for Shoprite to re-enter.
Shoprite made headline news in March 2018 when it announced its intention to enter Kenya with seven stores, following the collapse of local chains Nakumatt and Uchumi. But more than 18 months later it still only has 3 stores in Kenya. It looks underweight to compete against Majid al Futtaim’s Carrefour chain, which is aggressively growing sales and has also entered Uganda. Several years ago Shoprite and Nakumatt sniffed around one another but ultimately Shoprite decided the premium to enter Kenya was too high. Massmart, another South African retailer seeking to drastically cut its exposure in African markets also looked at buying leading Kenyan chain Naivas.
We think Engelbrecht will be forced to give investors a bone and exit some underperforming markets in a bid to regain control of the narrative and get the share pricing rising.
Fundamentally Shoprite is performing extremely well in what is still a challenging South African market, and where arch rival Pick n Pay has seriously upped its game under ex-Tesco man Richard Brasher. South African businesses are good value at the moment because of the weakness of the Rand. Majid al Futtaim has also announced it is potentially looking to buy a South African retailer, which makes Shoprite a target one way or another.
