Shoprite reaps benefits of investment in infrastructure

Shoprite Holdings is now reaping the benefits of its substantial long-term investments in infrastructure, said chief executive officer Whitey Basson in his comments on the group’s strong turnover and profit growth for the year ended June 2008. 

Turnover grew 22,3% from R38,950bn to R47,652bn. Trading profit was 43,7% higher at R2,297bn notwithstanding a sacrifice of R286 million in gross profit due to a management decision in October last year to cut margins on basic foodstuffs. The group resolved to provide a measure of relief to lower-income consumers who experienced a steep rise in the price of staples, given shortages on global markets. 

This growth was achieved primarily by its core supermarket division and in an environment in which food inflation averaged 13,8% for the period (against the group’s internal food inflation of 10,6%). Due to effective management tools, increases in the cost base were kept well below the increase in turnover, resulting in a significant growth in trading profit. 

Shoprite ended the year with a profit of R1,586bn, which is 46,1% higher than the R1,086bn of the previous year. Diluted headline earnings per share rose 54,1% to 298,6c and the board has declared a final dividend of 106c per share. This will bring the total distribution for the year to 155c per share or 53,5% higher than in 2007 and is in line with the group’s policy of maintaining a dividend cover of two times based on headline earnings per share. 

Basson said the main reason for the strong turnover growth was that the group’s substantial investments, made over a number of years, were increasingly bearing fruit. “We have invested heavily in the correct positioning of our three supermarket brands, in our operations outside of South Africa and in extending and upgrading our infrastructure to support the growth we are now experiencing. 

“When the credit crunch started to bite and consumers found their disposable income shrinking Shoprite, with its reputation for offering the lowest prices, was ideally positioned to benefit from the need of consumers across the income spectrum to obtain the most value for their money. 

“The cut in margins led to a substantial shift in consumer support for Shoprite and reflected in the increase of 11,2% in the number of customer transactions in South Africa. This resulted in a turnover growth of 25,0% and a market share gain of just over 1%, the highest in the sector. This shift is further confirmed by the most recent AMPS research showing that 42,7% of all South African consumers, compared to 39,6% a year ago, now do their main shopping at one of the Shoprite chain’s 302 supermarket outlets.” 

Basson said the repositioned Checkers chain, geared to the needs of higher-income consumers, also showed real growth with turnover increasing by 15,6% in South Africa. This was achieved despite the fact that proportionately Checkers opened far fewer new outlets than its immediate competitors. 

Basson said the group’s investment outside of South Africa was also paying off. “We have been operating beyond our immediate neighbours since 1995 when we opened our first outlets in Zambia. Today we operate 100 supermarkets beyond our borders which in the past year reflected strong sales growth. 

“Contributing to the value of our operations outside of South Africa is the fact that, as a group, we are now exposed to several economies and are no longer dependent on a single one. However, to operate successfully beyond our home border we had to learn to trade over vast distances. We had to invest heavily in supply chains, information technology capabilities and international sourcing skills, as trading in Africa is still logistically difficult. 

“The importance of controlling the flow of merchandise to our stores brought us to invest in a network of strategically placed distribution centres and transport fleets at a time when few others were doing so. These centres proved of the utmost importance in the past financial year, as they enabled us to buy aggressively forward when food shortages arose on world markets and also to stockpile merchandise as the service levels of local suppliers continued to drop.” 

Basson said the group’s furniture division operated in a highly competitive market characterised, unlike the food sector, by virtually deflationary conditions. “The division nevertheless managed to grow turnover by 5,6% - in my view a notable achievement - but despite this, trading profit was down 24,2%.” 

Basson said he did not expect current trading conditions to change materially in the new financial year and that the growth rate of the past year will not be sustainable. “While food inflation continued to rise throughout the review period we expect it to reach its peak towards the end of the year. By 24 August we already saw a deflation of 4,9% for the month in our fruit & vegetable business. Global food shortages will, however, remain a reality as competition for available stocks increases. I am nevertheless convinced that the group will continue to perform well because of the inherent strength of the business,” he concluded.