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Shoprite delivers strong interim results

Shoprite has grown its customer base by 6.3% in current conditions – Pieter Engelbrecht – new CEO, Shoprite Group.

NASTASSIA ARENDSE:  Retailer Shoprite posted a 15.5% jump in half-year profit that was buoyed by its operations in Angola and Nigeria. Joining me on the line is CEO Pieter Engelbrecht. Pieter, thank you so much for your time.

PIETER ENGELBRECHT:  My pleasure. Thank you for having me.

NASTASSIA ARENDSE:  Take us through the numbers. You’ve delivered really good results. Let’s break them down for the listeners.

PIETER ENGELBRECHT:  For me absolutely a delight and an excellent set of numbers. A 14.5% turnover growth up to a value of R71.3bn. That equates to the full-year turnover for us in 2011, which we’ve now done in six months. Our trading margin is now at an almost all-time high at 5.48%.

Most notably, I think, the trading profit is up 19.2% and headline earnings per share up 15.5%, the difference between those two being the R188m exchange-rate loss.

NASTASSIA ARENDSE:  When you look at the local market, what are you reading into that when it comes to consumer behaviour or the buying patterns of some of your loyal customers?

PIETER ENGELBRECHT:  What I need to say is that Shoprite has been able in these specific market conditions to grow its customer base by 6.3%. That equates to over R500m additional sales. So I like to refer to that by saying that the customers voted with their wallets. I don’t like to refer to it as that customers are buying down. I believe customers are looking for better value and Shoprite has been able to produce exactly that. It produces products and items of value to the consumers, so they then voted with their feet and their wallets and they supported us and they’ve been loyal to us the past six months. We hope to retain their loyalty by constantly improving our service – and hopefully they will not see any reason to leave us.

NASTASSIA ARENDSE:  I know the concern probably last year for many of the other retailers who are in the food sector was food inflation, and I know Whitey doesn’t necessarily agree with StatsSA’s assessment of where food inflation is. Where do you see food inflation going from a margin perspective for the rest of the year?

PIETER ENGELBRECHT:  Firstly yes, food inflation was high these past six months. It virtually doubled from 2.7 to 7.4%, reaching a high of 9.1% in December. But going forward we do see inflation coming down, partly because of the good rains in our country. It’s very dry in the Western cape, but our country has had good rains. And the strengthening of the rand and that has been coming through into some of the imports and raw materials.

Just by way of example, we’ve got 78 items in our fruit and veg department that are now at a lower price than they were last year. So we definitely see in the next six months that inflation will come down to the relief of the consumer. And we intend to increase adding to our private labels, which we believe bring extra value to our consumers. We have in the last year added over 500 items in our private-label range. We will continue to do that, to bring additional value and hopefully in that assist the consumer to alleviate the pressure from inflation as well.

NASTASSIA ARENDSE:  As I understand it, of the countries that you operate in outside the borders of South Africa, Angola and Nigeria were good performers. They stood out. What were the drivers beyond those numbers in Angola and Nigeria?

PIETER ENGELBRECHT:  If I take Angola first, Angola’s … has grown by 155%.  We increased customer count by 46%. The important driver of that was when there was the beginning of the currency shortage we were able to still bring product to their country, although we buy 60% of our product locally. The balance of the product was what they refer to as the real basic items. There was a shortage of those in the country and, with our treasury ability, we were able to stock our shelves with those items. We did not profiteer. We did not profiteer on those items because we were the only ones having them at the time and customers appreciated that – so much so that on national TV we were voted the No 1 brand in Angola. So I think the customers realised what we did and now we are quite a national treasure in that country. So we’re happy with that.

In terms of Nigeria, it’s mostly a like-for-like growth because of the ban on apparel. There are currently very few shopping centres going up because the landlords can’t find tenants for the shopping centres. You can imagine – if you’ve got no fashion retailer in the entire centre, then who do you put in there? A couple of cellphone shops and a supermarket. So the growth of new stores has slowed down, but our existing business has been able to grow by 60% and our customers by 10%, purely because we were able to overcome the difficulties and the supply line and ensure that we’ve got product on shelves, irrespective of the ban on a lot of products.

NASTASSIA ARENDSE:  There’s a part here where you mention that, in terms of potential for new markets, you are still constantly investigating that side, not only in Africa but elsewhere as well. Just to get your line of thinking – when you are looking for other markets, what are the three important  things that stand out to Pieter when he’s sitting with your board? What are the three important  things that these markets need to tick on your box?

PIETER ENGELBRECHT:  The first thing is that we will probably in this year do about R150bn in turnover. So in order for us to grow double-digits, let’s say 10%, that means we have to add R15bn in turnover to our group sales. Now that is a significant number. So what we have in the African continent is that, like all economies, we are up and down; sometimes we go faster, sometime we go slow. But at the moment that is not fast enough to maintain that high growth, so we have to look beyond that. So we are looking at developing countries. We believe the developing countries offer the best opportunities.

We need to do something that will make the needle move, that’s number one. Number two is you can go one or two ways. You go either to market where there is low competition, or you go to a market where there is high economic growth. So those would be the ones that one would consider before you enter the market.

Then you have to test the depth of the water, like the Chinese proverb, not with both feet. One has to see whether your style and your type of offering suits that particular market. And once you’ve made that decision you can then expand or do an acquisition, etc. So that would be the short answer to that.

NASTASSIA ARENDSE:  Going forward, what will you be focusing on for the business?

PIETER ENGELBRECHT:  Like we had in the presentation this morning, there are basically six points that we do. It’s very much a customer focus. We’ve got a lot of actions we started a while ago. We are just accelerating that programme in terms of our customer satisfaction and the measurements that we’ve put in place independently and subjectively across our entire portfolio.

Secondly, it is to increase our penetration of private labels, because we are lagging the market by about 5% and there is additional value for the consumer.

Third would be that we are under index, in terms of the higher LSMs, with our peers, and we believe that there is opportunity for a larger share of wallet because roughly about two million of our competitors’ customers also shop with us, which means we just need to do something to improve our share of their wallet.

The thing that all retailers have to do is that we are always striving to get more square metres, so add new stores. We are going to add 39 more stores in the next six months.

And finally, also additional investment in our supply chain, which we’ve done over the last 22 years in terms of … We will be adding another one in Cape Town, 123 000 square metres. It will include cold distribution.

We have also put a stronger focus on our franchise offer in terms of OK – the food side, that is. We reduced the brand from 14 to 3. We …the private labels,  introduced general merchandise, and added the money-market services.

And then, ja, I think you’ve spoken about Africa and going beyond. So that’s basically the things that we will be busy with in the next few months.

NASTASSIA ARENDSE:  Before I let you go, I know tomorrow you’ll probably be listening to the finance minister’s budget speech. What is that one particular thing you are going to be looking out for?

PIETER ENGELBRECHT:  Any, any possible sign for the economy to grow. Anything that can assist the economy to grow so that we can see job creation in this country, which we so desperately need, and something which we as a corporate have taken very seriously. We created over 7 000 jobs in the past year. We’ve assisted more than 3 000 students in terms of bursaries worth over R130m, and we hope that other private institutions will follow suit. But in terms of the finance minister, I’m very glad I’m not him. He’s going to have to do a very fine balancing act. But if there is any good news in terms of stimuli for economic growth, that will be fantastic.

NASTASSIA ARENDSE:  All right, Pieter. Thank you so much for your time.

PIETER ENGELBRECHT:  Nastassia, thank you very much.

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