Johannesburg - Whitey Basson, the CE of food and furniture retailer Shoprite Holdings, expects food inflation to fall into single-digit territory in 2009.
"Food inflation should come down as of October this year; next year, it should be in single digits. We've already seen deflation of 5% in fruit and vegetables in August."
Basson was speaking at a presentation of the company's full-year numbers to end-June, in which merchandise sales rose 22.3% to R47.6bn, while trading profit rose 43.7% to R2.3bn. Earnings per share were up 45.9% to 309.5c/share, coming in above analysts' consensus forecasts. The company's trading margin rose to 0.7 percentage points to 4.8%, its highest ever, according to Shoprite's deputy managing director Carel Goosen.
Food inflation for the year to end-June averaged 13.8% against the group's internal inflation rate of 10.6%.
As with other local food retailers, Shoprite opted to cut margins on low-margin, high-volume staple foods like bread and maize to stem the effects of rising food prices. The group did this in October 2007, and said this "led to a sacrifice of R286m in gross profit" in the remainder of the year.
Shoprite Holdings is benefitting from higher-income consumers opting to buy down to its stores as food and fuel prices, together with rising interest rates, have taken their toll on pockets.
"It's Shoprite's time in the economic cycle, and it's hitting a sweet spot," said Gryphon Asset Managment portfolio manager Abri de Plessis.
Shoprite Holdings' flagship Shoprite brand, comprising 302 South African stores out of 636 in the group, saw turnover rise 25% for the period, with the number of customer transactions up 11.2%.
Its Usave brand, which appeals to lower-income-earning South Africans and comprises 116 stores, saw turnover rise 30.5% on a like-for-like basis, with customer transations rising 21.9%
Du Plessis said the low-income consumer segment which Usave and Shoprite appeal to is that which is doing best in economic terms. "People in this segment are ungeared and don't have to worry about bonds and car payments, spending more than 80% of their income on food. Interest rates increases are not really eating into food budget."
Customers who frequent Pick n Pay, Woolworths and Spar have seen the cumulative 500 basis-point increase in the prime-lending rate since June 2006 eat into their disposable income. "Many people are having to buy down, and Shoprite benefits," said du Plessis.
Sales at Shoprite's 143 Checkers stores rose 15.6%; customers grew by 6.2% to 13.3 million customers a month. Shoprite CE Whitey Basson said Checkers' main objective is to become the preferred shopping destination for high-end consumers who fall into living standards measures (LSMs) 8 to 10. Checkers has the highest percentage growth of all retailers in LSMs 8 to 10, said Basson, who added that the brand is expanding its fresh foods range and ready-to-table meal solutions - areas on which the Woolworths brand has built its food offering.
Basson said it had been difficult for the Checkers brand to get into sites of its choice: "This should get eaier as we increase our dominance in the top end of the market as the second chain."
Du Plessis said Checkers had done "fairly well" in repositioning itself as a top-end player over the past two years.
Furniture drops
Sales in the furniture division, which includes the House & Home, OK Furniture and OK Express brands, grew 5.6% to R2.3bn, but trading profit fell 24.2% to R155.2m. Credit sales comprised 32.1% of all sales.
Aubrey Karp, the general manager of OK Furniture, said the fall in profits was due to sluggish trading and ongoing reductions in the House & Home credit business. Price deflation in home entertainment products also affected the figure.
Karp expects the slower trading environment to persist due to the "ongoing erosion of consumers' disposable income.
Africa expansion
The group's 100 stores in 17 African countries saw turnover rise 38.1%, with profit growth "exceeding 100%", said Basson. Basson said that despite rentals in African countries being dollar-based and "double that" of South Afrca's, the group struggled to persuade institutions to invest. "We've identified so many sites in Africa where we could position our stores," said Basson.
The group intends to open 16 stores in Nigeria, and will open two stores in the Democratic Republic of Congo, one in Kinshasa and another in Lubumbashi. In Nigeria, said Basson Shoprite "is doing a full study of where to put stores and is looking at manufacturing capabilities and regional warehouses. We are even looking to buy small business jets to get around," he said.
Shoprite has maintained its dividend cover policy of two times; a final dividend of 106c/share was declared, taking the total up to 155c/share, a 53.5% increase.
With cash earnings rising 45.3% to R2.4bn, a member of the audience asked Basson whether Shoprite would consider upping its dividend. Basson replied that with a 36% internal rate of return within the group, he would prefer to open 100 sites in Nigeria and 30 in Angola, but that the board would ultimately decide. "That's my dream," he said.
- Fin24.com