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JIMMY MOYAHA: Shoprite, one of the leading retailers in South Africa and one of my personal favourite companies – and I’ve just found out today that it’s actually the leading food retailer in the world – reported its interim results for the six months ended December 31.
Once again, I’m joined on the line by the company’s CEO, Pieter Engelbrecht, to take a look at these numbers and try to make sense of the company’s performance. Good evening, Pieter. Thanks so much, as always, for the time.
Last year when we spoke about the numbers, sales were up 17.5% – and that was a huge number. Coming off that high base, this year, on top of that, you’ve grown sales by 14.6%. What are you doing?
PIETER ENGELBRECHT: Well, focusing on customers. We’ve got a lot of data, and we are using it wisely to make price decisions, promotional decisions. Probably the number that tells us all of this for the six months [is that] at point of sale we instantly gave our customers R8.4 billion back in savings. I don’t think there’s another retailer that can quote that number.
Read: Shoprite delivers knockout half-year sales performance
JIMMY MOYAHA: R8.4 billion in savings? And this despite the fact that you still managed, I think, a figure around R12 billion? I’m just pulling up the financials again. I had a quick squizz at that earlier on. There was about R12.4 billion from a cash flow perspective in cash generated in the first six months. That’s a mighty impressive figure for any company over any 12-month period, but you did that in six months.
PIETER ENGELBRECHT: Yes. The business is highly cash-generative. Our cash conversion is around 122%, and we’ve got low debt. That is something that hit a couple of businesses quite badly in the past year because the interest rates went up so quickly that if you had some extra debt on your balance sheet, it would hit you very hard.
In our case, where we’ve got very low levels of debt, it’s still about R200 million of interest that we incurred for the six months.
So you can imagine what that did to some of the businesses with debt on the balance sheet.
JIMMY MOYAHA: It’s very difficult at this stage, Pieter, not to compare you to your peers in the market. I say that because we’ve seen companies like Spar go through SAP rollout challenges. We’ve seen companies like Pick n Pay going on an equity raise at the moment and looking to unbundle and all that.
Listen: Spar still not over SAP hurdle
But when we look at the numbers and, as you mentioned, the debt that Shoprite sits with, you’ve got about R6.6 billion in borrowings, which is less than what Pick n Pay has at about R7.2 billion in borrowings. But you have enough free cash flow at about R9.5 billion. You have enough free cash flow to equate to Pick n Pay’s entire market cap at the moment. That’s a very telling number. First of all, would you not consider buying out Pick n Pay if you could?
Read: Pick n Pay plans R4bn rights issue, listing of discounter Boxer
PIETER ENGELBRECHT: If one could, I would rather let us save the company than lose the company. I don’t think it’s good for South Africa to not save the company. But they’ve got their plans, and they have now made them public. So let’s see how this pans out.
JIMMY MOYAHA: Yes, let’s see how it goes. We know Sean Summers and team are hard at work trying to turn that business around, and we wish them the best.
Read: Pick n Pay chooses nuclear option with Boxer listing
But let’s look back to the Shoprite numbers. Are you planning on unbundling anything? Do you have any units? There’s no real need to [do so] from a business perspective and you are returning enough value to shareholders at this stage for it to not be too much of a concern, but is it something that’s crossed the board’s minds to say, ‘Perhaps we can unlock one or two things, or just list one or two businesses separately’?
PIETER ENGELBRECHT: Not right now. I don’t think any of them are on their own really meaningful enough to go on their own. It’s not always that simplistic also to, let’s say for a moment, split Checkers completely off from Shoprite and list it separately. That would take some work to be done.
I do not think it is necessary at this stage because the one thing that is very, very clear in this business is how clear we are in terms of which customer profiles and customers we serve by brand. Usave knows exactly what it does, and so does Shoprite, and so does Checkers.
And for Checkers right now our medium-term target is to achieve a 15% formal market share. It has now got there, 15.2%, so I do believe there’s still headroom to grow.
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There’s also some internal organic growth. I identified seven categories this morning where we under-indexed our average market share. So just to get that up to average really creates a huge organic growth opportunity.
And then we now have had multi-years of spending capital on data and technology-driven products like artificial intelligence, a pricing tool. It’s impressive what these things can do. As an example, that tool can do 400 million calculations in 30 minutes – the best of class in the world. We’ve got the personalisation tool; that has issued in the six months 454 million individual, personalised offers. We’re sitting on 12 petabytes of data. We’ve got 29 million customers’ Extra Savings data, where we have more than 5,000 data points on each one of them.
So all of this for us creates enormous opportunity. We’ve been able to re-platform Sixty60; we’re busy with it right now. There is some more news to come.
Read: Can anyone catch Checkers Sixty60? (Hint: No)
And there’s the financial services. We have also been able to rewrite that platform. So for a few years, we haven’t been able to launch new value-added-service products on there. Now we can again. So as you can hear, the list is long. That’s why we are going to spend R8.5 billion in capex this year.
JIMMY MOYAHA: Clearly no signs of slowing down at all. Pieter, let’s look at the environment that you’re operating in. A lot of the competitors have been finding the market quite difficult, and I want to get your thoughts around that, but also around the fact that as a retailer, and sitting in the space that you sit in, you deal with various kind of structures and models, and franchising is such a big part of that as well. How are you seeing the landscape from a margin perspective, from a consumer perspective – and how are you seeing that filter through into things like your franchisees and their performance?
PIETER ENGELBRECHT: Yes, I think you’ve spotted something. There’s definitely currently a lot of pressure on the franchise model in the retail space because of the pressure on margin. Because it’s such a highly competitive and very efficient industry, it’s a really hard click contested, and the efficiencies that have been gained – even though we’ve got all these other difficulties that we are trading in – puts enormous pressure on the level of margin that you can generate out of such a model that there’s enough margin in it for the franchisee as well as for the franchisor.
So your franchisees find it increasingly difficult to be able to generate enough cash to repay the loans and the money that they had to pay for the franchise.
Franchise fees per se are also another cash flow factor. That’s why, if you look at our franchise business, the OK Foods brand, you will see that they had high double-digit sales growth, but our income from them from a franchise-fee point of view is in single digits because our franchise is by far the most affordable. That’s where it lies. So if that is already in your base, it creates another problem for the franchisor.
JIMMY MOYAHA: Pieter, can we reflect on some of the debt that sits within the business? Obviously the business has very manageable borrowings, as we touched on earlier. Everything is on the conservative side for the business, and you’re strategically looking to roll out that R8 billion in capex. I see that there’s something that wasn’t on the previous set of financials that we spoke about, and that’s that Nigerian treasury bills have now been added in this space.
Read: Shoprite execs will be staring in disbelief at this one number
I bring that up only because the Nigerian picture has been so interesting for the likes of MTN, which operated in that space with the devaluation of the naira and the consistent worries around the tax implications from that perspective. Obviously it does at this stage look like a fairly small amount at R26 million on your balance sheet. But what are your thoughts on the Nigerian business as well as the rest of your continental operations?
PIETER ENGELBRECHT: We have exited Nigeria, barring now being left with four shopping centres. I said three earlier, but it’s actually four shopping centres that we still own. We have been lucky to have been able to repatriate all of the money that we had there in terms of the sale agreement. We still have about two years left in terms of a service arrangement with providing some expertise and systems to the purchaser of the business in Nigeria.
The treasury bills? Really, the one that’s about R1 billion is in Angola and that is going to mature soon. There’s no guarantee that we, again, will be able to get the dollar-linked treasury bills that we used to have as a hedge.
So there is a bit of exposure that may possibly come if we can’t repatriate that money.
JIMMY MOYAHA: Well, there is certainly something to look forward to in our next conversation other than extraordinary results. But I think we’ll leave it at that for now, Pieter. Thanks as always for the time. That was Pieter Engelbrecht, CEO of Shoprite, giving us a sense of their performance for the first half ended December 2023.
