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Tough market trading conditions have not stopped Shoprite Holdings from producing impressive financial results and it has been able to outperform its competitors across the African continent.
Shoprite has generated its success through astute management while also tapping into the growth evident in the lower to middle-income market. The group has also benefitted from the huge cost-savings it has achieved through employing a centralised distribution strategy.
The retailer’s revenue is largely derived from sales of food and general merchandise through its supermarkets, but is also exposed to the furniture sector and other consumer-related businesses such as retail pharmacy, liquor outlets, fast food, money transfers and event ticketing.
Shoprite’s broad business model allows it to capture consumers across all income segments:
• Checkers, Checkers Hyper and House & Home stores, which are focused on the higher-income market;
• Shoprite and OK Furniture, focusing on the broad middle- to lower-income markets; and
• Shoprite Usave, which focuses on the lower end of the market.
Early investment in centralised distribution and logistics coupled with its close ties with suppliers has been the major differentiator for Shoprite. This has not only allowed the group to control its own supply chain, but has reduced the costs associated with stores needing to incorporate big loading and storage areas to hold large inventories.
Today, with 2 689 stores operating in more than 10 countries across Africa, employing almost 144 000 people, the group continues to seize new opportunities for growth while improving its value proposition to customers.
The success of this business is evident in the dividend and share price track record of the company, as illustrated in the chart.
Shoprite’s share price and dividend payments to shareholders have grown at a compound annual growth rate of approximately 20% since 1997.
The new CEO, Pieter Engelbrecht, who took over from Whitey Basson at the beginning of the year, has been re-energising the business while maintaining its core strategy.
Focus remains on growing the contribution of private label offerings within the group, improving distribution efficiencies, enhancing the fresh offering within Checkers to capture a larger portion of the higher-income consumer, and using its data analytics better to drive inventory turnover and shelf availability.
At Marriott, we believe that Shoprite Holdings will continue to produce above-average earnings and dividend growth in the years ahead for the following reasons:
• Growth in all economic cycles due to its defensive offering;
• Pricing power further enhances Shoprite’s ability to produce consistent dividend growth;
• The group has the right store formats, group balance sheet, the right logistics and well-priced products to capitalise on the opportunity to consolidate the informal market;
• Africa remains a high-growth opportunity and Shoprite has established infrastructure. With more than 20 years’ experience in these markets, it has a first-mover advantage to capitalise on the growth opportunities in these markets ahead of peers; and
• The group is highly cash generative, which should support profit growth and dividend payments in the years ahead.
The current dividend yield of Shoprite Holdings is 2.4%, which is slightly below the FTSE/JSE All Share Index’s yield of 2.8%. However, when you take into consideration the above-average dividend growth prospects of the business, this valuation is not overly demanding.
In summary, Shoprite ticks all the boxes required to produce predictable growth in dividends over the long term and has a proven track record, demonstrating an ability to perform well in adverse economic conditions. It is for these reasons that Marriott believes that Shoprite should form a core holding in an investor’s portfolio.
Brian Vambe is an investment professional at Marriott.
This article originally appeared in the 16 November edition of finweek. Buy and download the magazine here.
