What went wrong when Shoprite tried to push north

Two decades ago, Shoprite Holdings Ltd unveiled an ambitious plan to expand beyond its home base in SA, and over the following years the company entered more than a dozen countries north of the border.

Along the way, it became the continent’s biggest grocer by tapping into markets with rapidly growing populations but little formal retail. Investors loved the idea, confident developing economies would spur demand for bread, champagne and just about everything else. Shoprite seemed the right vehicle for their optimism, given it had outperformed competitors in SA and proved its aptitude for selling basic groceries, housewares, pharmaceuticals and luxury goods.

Today Shoprite has largely retreated back to SA and a few nearby places after shutting its operations in eight countries farther north.

In September it said it had wrapped up operations in Madagascar and Uganda, and last year it left Nigeria, where it once aimed to have as many stores as in SA, and Kenya. The operations suffered from difficulties finding good real estate, high relocation costs for managers and subpar infrastructure ( transporting a truckload of products across Lagos could take 24-hours). Currency instability and foreign exchange shortages made it hard to repatriate earnings.

“The stark reality is the farther Shoprite moved away from SA’s borders, the less profitable, more complex, and more difficult it became,” said Syd Vianello, an independent analyst in Johannesburg.

“Each market has its own peculiarities.”

Other SA retailers such as Woolworths Holdings, Truworths International, and Mr Price Group have seen cash shortages and import restrictions similarly hobble their pan-African operations.

Those setbacks, along with Shoprite’s pivot, offer a cautionary tale for the likes of Walmart Inc and France’s Carrefour SA looking to Africa for growth.

Walmart expected its SA subsidiary, Massmart Holdings Ltd, to give it a foothold in a fast-growing region, but it is shifting its focus to SA and adjacent countries.

Carrefour said it aims to keep growing in East and West Africa.

From a business growth point of view, some retailers believe you simply have to make Africa work,” said Alec Abraham, an analyst at Sasfin Securities in Johannesburg.

The linchpin of Shoprite’s strategy was Nigeria, and it got off to a strong start. In 2005 it opened a supermarket in a new shopping centre in Lagos, the largest city in Africa’s most populous country, and within a decade it had a dozen locations.

With a high concentration of wealthy locals and expatriates,—and an economy fueled by near-record oil prices, the Lagos outlets could sell expensive goods such as dry-aged steaks and imported wines and cheeses, helping to fuel modest profits.

However, Shoprite stumbled as it expanded elsewhere in the country, where salaries were lower and most consumers could afford little more than rice and cassava. Compounding the trouble, most of its rent was in US dollars, but its customers paid in the depreciating local currency.

In Kenya and Nigeria, food sales are dominated by smaller local chains, neighborhood shops and street stalls. While Shoprite can typically beat them on price, the convenience of shopping locally frequently trumped that advantage.

In Angola, Shoprite’s woes have been tied to the boom-and-bust nature of an economy dependent on oil exports, where spending power collapses every time the price of crude declines.

“This kind of volatility brings risk, especially when falling currencies make it hard to get dividends out,” said Evan Walker, a manager at 36ONE Asset Management Ltd in Johannesburg.

Scaling back and reducing the complexity of its operations abroad has helped boost Shoprite’s profit from that business to R439m in the fiscal year that ended in July, from a loss of R37m in 2019.

Though the company won’t be quite as fast to make more moves abroad, it hasn’t entirely written off its ambitions to create a continentwide network of stores.

The strategy could shift if “we see these markets either change or develop and if opportunities are opening up,” CEO Pieter Engelbrecht said on September 6 when announcing completion of the latest pullback.

If Shoprite does revive its expansion plans, it must be prepared to plow plenty of money into the markets it chooses, said Atiyyah Vawda, an executive director at Avior Capital Markets in Johannesburg.

Finding suitable locations and developing the logistical prowess needed to efficiently ship the fruits, vegetables and meats that make up the bulk of its earnings won’t come cheap. Tackling currency risk as well as ensuring it can get its cash out are imperative.

“It’s tricky,” Vawda said.

“Currencies are often volatile, and you have to sell a lot before you can hope to make a profit.” 

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