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Food and drug retailers

Jun 02 2010 15:41

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South Africa's three major supermarket groups – Shoprite Holdings, Pick n Pay Stores and The Spar Group – greeted 2010 with question marks hanging over them after the Competition Commission fingered them, alleging cartel activity.

While all three have denied allegations of price collusions and (at the time of writing) investigations were still under way it’s noteworthy to mention the dominance of all three retailers in SA’s food market has been an issue for some time, with consumer organisations complaining about high food prices and independent supermarkets saying it’s hard to compete with the three chains.

Whether the investigations are based on substance or not, the allegations are too serious to be ignored.

And, given the commission’s track record, markets are eagerly watching what’s going to become of the matter.

And so is the average consumer.

Challenging times
         
Allegations of price-fixing aside, 2009 was the year in which strengths of companies were put to the test, with corporate retailers challenged to demonstrate their abilities to lead in the most difficult times.

SA had fully entered into recession.

But for retailers in the food and drugs sector it was a matter of proving the resilience of their stocks.

And the consensus view says they did, albeit at lowered expectations.

Consumers can shun spending on discretionary or durable goods in a recession but they can’t stop eating or buying medicines when sick.

As such, reported growth in headline earnings per share were double digits numbers across the three retailers, with new addition Clicks Group also providing impressive figures.
    
As in 2008, food inflation remained a concern.

After a sharp rise in that year it dropped significantly in second-half 2009.

To understand the impact of that on retailers you’d have to consider Spar CEO Wayne Hook’s tale of two distinct halves when he delivered results for the year to August 2009.

Completing 25 years with the group, Hook told shareholders: “During the first six months food inflation ran at an average of 16% and group turnover during that period increased 24.5%. The second six months saw food inflation decline significantly to an average 9%, which – with increased pressure on consumer spending – resulted in a sharply reduced turnover increase of 14.9% for the period.”
 
Those days are over

It was a subtle warning Hook was sounding to shareholders that the windfall of high food prices was abating.

And that was to be the case for the remainder of 2009.

By December, food inflation had fallen to less than 5%.

For example, pan-African retailer Shoprite reported group internal food inflation had declined to 3% by year-end 2009.

The result was a turnover growth of 11.9% to R33.1bn in the group’s first half period.

Nevertheless, Spar remains ahead of its peers in the sector, largely due to its low income earning market.
   
While the decline in food prices – coupled with the aggressive interest rate cut during the year – should have aided consumer spending retailers’ trading updates on festive season sales paint a different picture.

Consumers aren’t yet back on their feet.

Rueben Beelders, a retail analyst at Gryphon Asset Management, says: “It’s clear that with low food inflation retailers are experiencing some pressure on the revenue line.”
 
Worth a shot


During the year, Pick n Pay completed its conversion of its loss-making Score stores into Pick n Pay family franchises, a strategy some analysts doubted would yield any positive outcomes.

But the results have been impressive, with the group reporting a 34% turnover growth in those converted stores.

Says Pick n Pay CEO Nick Badminton: “We realised people weren’t interested in buying from Score – they wanted to buy from Pick n Pay.”

The group also had to say goodbye to its founder, executive chairman and retail pioneer Raymond Ackerman, who announced his retirement at the end of the group’s 2010 financial, ending 42 years of a rewarding career.

His son, Gareth, will succeed him as non-executive chairman in the spirit of the King III recommendations on corporate governance.

Also last year, personal healthcare and pharmacy chain Clicks changed its name New Clicks to Clicks Group and listed in the food & drugs category on the JSE’s main board to reflect more accurately the type of merchandise it sells.

Proving the defensive nature of its business, Clicks lifted turnover 15.4% to R12.7bn and reported a 16.7% growth in pre-tax profit.

The group has also been on a pharmacy rollout spree, with a long-term ambition to erect an in-store pharmacy in all its Clicks chains.      

Eskom’s 35% request to increase electricity prices over the next three years has also been an area of concern for retailers, with many fearing such an increase would inevitably result in high operating costs, which will then filter through to prices.

Defensive as they are, such stocks remain largely expensive, with earnings multiple of 15 to 18 times.

 - Finweek
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Beverages

2010-06-02 15:46

 
 
 

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