FIFI PIETERS: Shoprite, the biggest retailer in Africa, released its annual results earlier today. Management said they were pretty pleased with the group’s performance this time around, which showed the Shoprite customer spending an additional R19.6 billion across the group’s 1 789 stores.
But it seems the market had a different opinion of Shoprite’s performance to that of management, if the stock price is anything to go by. Shoprite’s shares at one stage fell 7% on the JSE, suggesting investors had expected a bit of a better performance than Shoprite delivered. We’ve got Pieter Engelbrecht, the Shoprite CEO, on the Market Update for more on the numbers.
Pieter, thanks so much for your time. I know that CEOs don’t particularly look at stock price movements on a day, but what did you make of the market’s reaction to your financial results?
PIETER ENGELBRECHT: Well, there’s quite a number of record achievements through these financial results.
So yes, it’s interesting that that was the market reaction where the sell-side analyst put the share price at [considerably] higher than it currently trades [at]. The volumes haven’t been high in the trading.
The only thing I can make of it is I think maybe some people have forgotten about the employee trust that we created, and that in the second half of the year we paid R128 million in dividends to them – but that goes through on the staff cost line.
And we did, at the time of establishing the trust, say that our shareholders should expect a 2.7% to 3% dilution on Heps [headline earnings per share].
That’s [all] I can think of.
FIFI PIETERS: One analyst I spoke to a little earlier today mentioned the issue of margin pressure. I don’t know if you agree – particularly in the South African business?
PIETER ENGELBRECHT: Well, we maintained our gross profit margin of 24.5% of last year, and stayed the cheapest supermarket in South Africa. We are sitting at a 6.8% trading margin, which I think globally compares very favourably. And even comparing that to our competitors in the SA environment there’s quite a large margin of difference. So I think the kudos here for us to take away is to maintain the gross profit margin and the trading margin.
Something that I would like to bring your attention to is the increase of 19.6% in other income.
We have warned or alerted the market for the last five years to that – that we are doing a lot of these alternate and complementary revenue businesses after we re-platform the business, and we can add all of these services. One actually has to add that back to the trading profit line to get a real picture, because these additional revenues are going to get just bigger in time to come.
FIFI PIETERS: On the prices, though, and maintaining lower prices – you and I speak about this every time you release your results, and I ask you how long you can continue to do that for, because I see that selling-price inflation is again pretty low this time around – at 3.9% or so at a time when consumer inflation is sitting at around 7.8%. How long can you manage that equation?
PIETER ENGELBRECHT: In July we saw our internal inflation reaching 7.3%, and our estimate is that we are probably going to get to around 10% internal inflation.
[For] the difference between our internal inflation and the national inflation, we take the current basket – in other words, what people currently are buying – and then look what the prices were last year. That’s our internal inflation, whereas the national inflation is a fixed basket.
So we look at last year’s price, and what it is now this year. That doesn’t take into account if people change brands or – I don’t want to call it buying down – but [buy] alternate products or opt out of a category. So I think our internal inflation is a more accurate number. As I say, I think around 10% is what we can be looking at.
FIFI PIETERS: All right. So 10% internal inflation. Are you saying that the price of your basket is going up by 10%, or went up by 10% this time around?
PIETER ENGELBRECHT: We are now at 7%. So I expect your basket’s going to go up over 10% this year. That means my customers are looking for value across [the board]. That’s why a very meaningful number is that to our Xtra Savings members we gave R9.4 billion in extra discounts this year, and I don’t see that changing. We will have to continue to invest in that. Also what we’ve seen is that the participation of promotional items in the basket has increased. So customers are definitely shopping for value.
FIFI PIETERS: All right. And they’re shopping a lot. You did report that you received an additional spend of R19.6 billion this time around. So describe to us the buying patterns of your customer, Pieter. What are they shopping for? How frequently are they shopping, and how does it compare to this time last year?
PIETER ENGELBRECHT: My answer there would probably be referring to the 24 million customers that we now have from the Xtra Savings programme, which gives us a great wealth of data and insights. These days it’s much more scientific for us to determine what customers want, when they want it, and what that price sensitivity is around the category or specific products. We use that to help us manage the margin.
On top of that we also, when we replatformed five years ago, introduced line-item profitability, so that we can measure each and every item on its own in terms of its contribution and how it starts to shrink – or [affect] margin contribution. So that’s how we are managing it; it’s much more scientific.
And then [there is] also the ability that we now have to do personalised offers. In that instance you have a select audience of customers that may have stopped buying a specific product. You can remind them in real time that maybe they’ve forgotten about it, and then you reduce the spillage of the marketing spend. All of that is forming part of protecting the margin in totality.
FIFI PIETERS: Looking ahead, what does the year ahead look like for Shoprite? We just had the growth numbers coming out today, showing that the South African economy got smaller in the second quarter. What are you looking forward to in the year ahead, and what does a slowdown in the economy mean for you?
PIETER ENGELBRECHT: Firstly, we are still focused on our core business. So we are going to open another 275 stores in the year to come, and continue to build on that ecosystem around our bricks and mortar; we will invest more into digital, and make sure that we have such a compelling offer for our consumers that we can save them money as long as they shop or transact within our environment. That’s why we have that bank account that, as long as you use it within our environment, charges no transaction fees.
Those are the things that we are looking for to make sure that we give the best value to customers.
FIFI PIETERS: All right, Pieter, thanks so much for your time, sir. We’ll leave it there. Pieter Engelbrecht is the CEO of Shoprite.