Tough trading climate for Shoprite in rest of Africa

23 January 2019 - 08:42 By Larry Claasen
The quarterly drop in sales should be seen as part of the risk that comes with doing business in Africa, says a Sasfin senior analyst. Picture: BLOOMBERG
The quarterly drop in sales should be seen as part of the risk that comes with doing business in Africa, says a Sasfin senior analyst. Picture: BLOOMBERG

The South African retail giant was hurt by sharp devaluations in some African currencies, as well as a recession in Angola.

Shoprite’s African operations hit a speed bump as a recession in Angola and sharp devaluations in some of the continent’s currencies dragged down its cross-border revenue.

The 17.24% fall in non-SA revenue for the quarter to end-December is a setback for the group, which has long seen its expansion into the rest of Africa as a major driver for its growth.

Under former CEO Whitey Basson, Shoprite has built a retail empire that sees it operate 308 stores in 14 countries across the continent.

For a long time its cross-border operations have been the group’s biggest growth driver, but recently it has seen its rest of Africa operation come under intense pressure.

News that revenue was down double digits in its latest quarterly results followed the group reporting a 12% sales drop to R21.4bn for its African operations in the year to end-July.

The quarterly drop in sales should be seen as part of the
risk that comes with doing business on the continent, said Sasfin Bank senior equity analyst Alec Abraham. "Africa brings a lot of volatility."

Abraham said that when Shoprite’s expansion into Africa was going well it went really well, but when things went wrong it tended to struggle.

In the Angolan operation, where it operates 30 stores, sales declined 49.55% during the quarter.

This performance was in contrast to when it grew sales 47.4% for the financial year to end-August 2017.

Besides the problems in Angola, currency movements also hurt Shoprite, with the Zambian kwacha falling 20% and the Nigerian naira dropping 17% against the US dollar.

SA’s largest retailer, Shoprite pointed out that when its Angolan operation was not included, its cross-border stores increased sales by 4.41% when measured in constant currency.

Gryphon research analyst and portfolio manager Casparus Treurnicht did not think currency movement should be dismissed when it came to measuring the performance of its African operations.

"It’s become clearer to investors that reporting constant currency numbers makes no sense when your foreign markets continuously suffer currency depreciation."

Treurnicht also did not buy into the idea that it was acceptable to take on more risk when it came to expanding across the continent. "It was simply a bad strategic decision to venture that aggressively into unknown territories."

Aside from its African operations, its SA stores increased sales by 3.18% for the quarter. Although this was an improvement on the previous quarter’s 1.89% growth, the group said its middle-income consumer base remains under pressure.

This could be seen in Christmas sales categories like back-to-school essentials, which outperformed traditional discretionary purchases such as toys for the first time.

Shoprite said it had resolved the labour issues at its largest distribution centre in Gauteng, which accounted for 53% of its centralised food distribution in SA and completed the year-long migration to a new IT system.

Treurnicht said that the changes to its IT system could be far-reaching. "Upgrades to IT will help Shoprite make better decisions; limit the impact of bad ones."

Overall sales rose 0.03% to R72.9bn for the six months to end-December. Shoprite opened 50 new stores in the period and is
on track to open another 37 before June.

claasenl@businesslive.co.za

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