QUESTION ONE [75]

Read the following articles and answer the questions that follow:

ARTICLE 1

Timing of Shoprite's R1bn deal is perfect

The company has made a sharp move snapping up assets that are perfectly located

26 AUGUST 2021

Days after Shoprite unveiled a more than R1bn deal to buy Massmart's discount grocery chains, data showed SA's unemployment rate hit another unwanted record, vindicating the grocery retailer's strategy of bulking up on its discount offering.

The timing of the deal is perfect. For one thing, the pandemic has not only shifted much of the shopping online permanently, it has also turned some customers into budget-savvy consumers after multiple industries fired workers or forced employees to take deep pay cuts.

With industries such as airline, hotel, restaurant and alcohol still running on fumes as revenue-sapping restrictions remain in place amid the slow Covid-19 vaccine rollout, it would not be unreasonable to imagine that, for many, salaries have not recovered to pre-pandemic levels, and that most of the people laid off will not be returning any time soon.

Even though Shoprite, under its Checkers chain, has launched an onslaught on Woolworths' turf with an aggressive top-of-the-pyramid strategy in a laudable diversification drive, the deal with Massmart underscores CEO Pieter Engelbrecht's determination to keep the company's raison d'etre largely intact, which is that there are more people at the bottom of the pyramid than the top.

Discount retail is not popular only with consumers; companies in the sector are among the must-haves in fund managers' portfolios. Mr Price is among the top-performing stocks on the JSE, having doubled in value from the lows of 2020 when it became clear the pandemic was set to wreak havoc on the economy. And you are likely to find few investors complaining about the price at which Shoprite snapped up the assets, which are located at taxi ranks and rural shopping malls the heartland of its vast budget-conscious customer base.

Shoprite scooped up the stores as valued on Massmart's books, or net asset value a valuation metric that takes no account of the future prospects of a business. Granted, Shoprite is getting supermarket chains that have not been profitable: their combined losses widened from just under R300m in 2019 to more than R360m in 2020, an indication of the scale of the challenge facing Engelbrecht in ensuring that some of the more than R8bn in revenue flows to the bottom line.

It is also safe to assume that the Competition Commission, which probes all mergers and acquisitions for antitrust and public interest issues like black ownership and job losses, is almost certainly going to put in place a job cut freeze moratorium if it approves the deal. That will only make difficult any plan to push through a punishing job-cutting strategy.

That said, Shoprite boasts one of the highest profit margins in the industry, ammunition that helped it withstand an onslaught from Walmart, the intention of which was to push Massmart deeper into grocery retail with price and margin strategy when it acquired a controlling stake in the business a decade ago. Alongside its perfected cut-price business model, the margins give it more than enough room to revive the 56 stores, as well as ensure that three other fruit and vegetables outlets in Durban, Cape Town and Johannesburg and a meat-processing warehouse keep pumping out profits.

As alcohol becomes more central for retailers, Shoprite is acquiring 43 liquor stores without the administrative hassle of having to apply for licences. The four liquor bans since Covid-19 hit SA in March 2020 have been brutal on retailers, but the stores are expected to have a bright future in the long term.For Massmart, it is hard to dispute the logic of flogging businesses that have struggled to make any meaningful inroads on the SA grocery sector. Sometimes it is best to cut one's losses. Massmart has been a huge disappointment for Walmart, which has since brought turnaround specialist Mitchell Slape to revive the company's fortunes and return it to its roots as a general merchandise retailer.

The acquisition is not going to bring quick returns for Shoprite. But consumer trends are in its favour.

https://www.businesslive.co.za/bd/opinion/editorials/2021-08-26-editorial-timing-of-shoprites-r1bn-deal-is-perfect/

ARTICLE 2

Shoprite bets on precision retailing to woo customers

08 SEPTEMBER 2021 GUGU LOURIE

Technology is radically changing the global retail landscape, with rewards programmes at the centre of that transformation. Here at home, Shoprite, through its rewards programme, is at the axis of this retail makeover. Furthermore, the Covid-19 pandemic has accelerated the digital transformation of SA's retail sector.

But what do customers benefit from these developments that include precision retailing?

My cousin Yazeed is a regular pragmatic chap. Not surprisingly, he is sceptical about rewards programmes even if they are linked to technology improvements. "You see, those retail rewards programmes, promoted through smart cards, are meaningless and make some amongst us feel important as they fatten our wallets," said Yazeed.

"Show me, even with bad debts, one person who doesn't have more than five of those rewards cards. The only role they play is to provide us with a false sense of affordability and creditworthiness and get us to be imbeciles.

"They are just smart cards that force you to buy recklessly, but they need to be cut to pieces like those expensive credit cards and thrown into a bin." Explaining the benefits of retail precision regarding rewards programmes was not going to be easy, I thought to myself.

"Look, Yazeed," I said, pointing to an article quoting a retail fundi. "I am pleased to have been part of the successful transformation of Shoprite's retail model, utilising technology to enable greater precision in matching our retail offering to customer preferences," Christo Wiese, Shoprite's former chair, was quoted as saying.

Wiese recently said Shoprite's capability in this regard was in line with international retailing lead practice. I could tell Yazeed was neither making sense of this "mumbo jumbo" nor particularly interested.

"Shoprite Xtra Savings Rewards Programme is meant to offer a data-driven retail environment that enables customer profiling and the ability to tailor services to meet customer needs," I proudly stated. Yazeed kept quiet. He was not following the logic.

I needed him to understand that retail precision was important to shoppers and retailers to maintain and grow their profitability. In 2018, Shoprite SA's largest retailer expanded management capacity and employed new talent to future-proof the business and lead innovation in customer experience, e-commerce, analytics, supply chain, financial services and sustainability.

This was the first step towards ensuring precision retailing was delivered to millions of Shoprite's customers. The following year, customer data assisted Shoprite to adjust and revise 57 merchandise categories. Without data, that would have been a pipe dream. In 2020, Shoprite's growth was increasingly data-driven to extend its pricing and promotional leadership and refine inventory management. In 2021, its homeward pivot is showing signs of paying off as the group on Tuesday reported an 8.1% increase in sales of merchandise. In rand terms, this growth equates to an additional R12.6bn in sales on 2020's restated base. The total was a record R168bn in sales for the year.

Shoprite's core supermarkets in SA reported strong sales growth of 9.3% from a high base. The segment's R133.9bn in sales was a combined effort from Shoprite and Usave businesses, which increased sales by 8.8%, and Checkers and Checkers Hyper businesses, which increased sales by 10.9%.

Those are huge numbers that are not easy to replicate by other local retailers such as Pick n Pay, Spar and Woolworths. "This growth is a testament to our loyal customers and the relentless commitment of our team who ensured we delivered unsurpassed value, either in-store or digitally, throughout the year," Shoprite CEO Pieter Engelbrecht said on Tuesday.

"There is no doubt the digitally-led future being ushered in for many as a result of the Covid-19 crisis is already a day-to-day reality for Shoprite. However, from an IT perspective, with the adoption of our single system of record a few years ago, the team has become increasingly collaborative and innovative."

But how has Shoprite prepared for this future?

Years ago, Shoprite ensured it would remain the top grocery retailer in SA. But the road was fraught with challenges and losses. Before 2018, Shoprite invested in enterprise resource planning (ERP), which unfortunately negatively affected its profits. That year, the grocer lost more than R1bn in sales.

For the past few years, Shoprite has been implementing an ERP system in SA based on software from Germany's SAP. The company spent billions on this software solution. The ERP system and software integration enabled Shoprite to do things it would not have been able to do in the past. That said, 2018 was a transformational year for Shoprite, and the IT re-platforming was an imperative and represented the culmination of years of planning. It is now making the retailer competitive. Shoprite has signed up 20.3-million Xtra Savings Rewards Programme clients in the 53 weeks to July 4. The rewards programme will fuel customer spending. This is an excellent achievement by Shoprite.

In that regard, it is way ahead of its main rival, Pick n Pay, which has 8.5-million active Smart Shoppers, who swipe their rewards cards for 75% of all sales.

Clearly, the Xtra Savings Rewards Programme, launched by the Shoprite supermarket chain in October 2020, is ahead of its competitors and setting the trends.

It seems Shoprite's investment in digital infrastructure, particularly the integrated ERP system, has enabled real-time oversight of the entire business.

Shoprite seems to have learnt a considerable amount about its customers' shopping patterns and preferences in a short time. This is an exciting initiative and a significant first step in its digital transformation towards a more straightforward, smarter Shoprite.

The system has been transformational in how Shoprite manages, views and uses information, and will prove more significant as it starts using it more critically.

That said, this will help the retailer to create a truly differentiated customer experience by leveraging customer data and advanced analytics, enabling it to be more precise in managing inventory, making merchandising decisions and offering a more personalised customer experience.

The retailer's brick-and-mortar footprint remains key to its ability to drive growth and expansion into new channels as it uses its improved technology-driven insight to make informed retail decisions.

Furthermore, as part of its focus on precision retailing, Shoprite's on-demand grocery delivery service Checkers Sixty60 is now SA's top grocery app with more than 1.5-million app downloads.

Checkers Sixty60 and Checkers relentlessly innovate to respond to customers' demands for hyper-convenience.

The mobile app delivers groceries and drinks at the touch of a button and offers the same value for money for which Checkers is renowned. Users can track the status of their order and delivery in real-time. The on-demand grocery delivery app has scaled rapidly, operating nationwide from 233 stores, which serve as micro-fulfilment centres.

These innovations are Shoprite's effort to innovate to simplify the customer experience across physical and digital interactions. They stand the retailer in good stead.

To diversify its revenues, Shoprite launched its mobile virtual network operator (MVNO), called K'nect Mobile, offering competitive rates and several other rewards to customers.

In terms of diversification, it seems Shoprite's future is to grow and monetise its ecosystem of value for customers. It can deliver significant benefits to its customers and workers after launching a new ground-breaking digital business hub, ShopriteX.

ShopriteX combines data science, technology and innovation with its operational strength to provide increasingly enhanced customer experiences.

"The next era of growth for us is about precision retailing," said Engelbrecht. "ShopriteX will use our rich customer data to supercharge a 'Smarter Shoprite' and ultimately fuse the best of digital with our operational strength across the continent.

"Through a culture of innovation and start-up-like pace, our teams are making grocery shopping more personalised for customers while removing friction from the retail experience." It seems Shoprite's hunt for profits is betting on data-driven retailing. On the downside, this development could mean retrenchments for Shoprite workers. But job losses can be avoided by retraining till operators so they can perform other necessary functions. This will enable them to be fit for the future of new retail.

Finally, it seems Shoprite is setting itself up to win in the long term through precision retailing, which is in its infancy.https://www.businesslive.co.za/bd/opinion/columnists/2021-09-08-gugu-lourie-shoprite-bets-on-precision-retailing-to-woo-customers/

ARTICLE 3

Why gung-ho Shoprite sees no slowdown

09 SEPTEMBER 2021 GIULIETTA TALEVI

It's hard to overstate just how good Shoprite's profit margins are. Not only is 6.1% more than double that of Pick n Pay or Spar, it comfortably bests world leaders like US retailers Walmart (3.3%) and Kroger (1.95%) and even private German powerhouse Aldi (3.9%). Results for the year ended June show a 21% jump in trading profit, to R10.3bn, as shoppers spent more on their baskets, even as they visited stores less frequently. The FM spoke to CEO Pieter Engelbrecht.

Can you sustain these margins?

PE: First, what makes that number so great is that I can still say to you unambiguously that Shoprite is the lowest-priced supermarket in SA. We are price mad and we will not be beaten on price. That margin comes from efficiencies, from running a very tight ship, and my standard answer is that I think we can maintain that.

Does that make you a takeover target? Or has that ship sailed past SA?

PE: What I've found lately is that a lot of the international retailers are retreating to their home markets. It's becoming increasingly difficult to trade in foreign markets because of a global change [partly] from governments promoting "buy local", and [supporting] local business.

Bloomberg Intelligence suggests that you need to rebuild your non-SA margins to justify continued capital spend there. Do you agree?

PE: We already changed our operating model quite significantly in terms of local sourcing and that has had quite an effect. We were able to increase profitability fourfold to R307m, [within] the short-term target we set of R300m-R500m, with a lot of efficiencies, improvement on things like shrinkage and wastage, and I think it's a sustainable result with the 10 countries that remain in that segment.

Shoprite has spent R800m buying back shares will that continue, because it does suggest a shortage of opportunities for your capital?

PE: We were mandated at the mid-R150s for a buyback, so I think the price is now a bit expensive, but that still remains one of the items we will explore, looking at our cash position.

Having said that, you talk about a "plethora" of opportunities. You've just bought some businesses from Massmart, including Masscash and Cambridge Food. What else can you do?

PE: It's the Massmart acquisition [and] there are some other acquisitions we're exploring, both of a physical nature as well as digital. Then there's the whole momentum we have on the digital [side] of the business and better use of marketing spend we can achieve, plus the 133 new stores we want to open. Masscash will add about R10bn of revenue it's right up our alley and then I don't see the end of market share growth, especially in the Checkers brand. Checkers on its own commands less than 15% market share and I believe there's still headroom to grow. Why will Masscash and Cambridge succeed in Shoprite if they didn't in Massmart?

PE: Well, food retail is what we do: our supply chain is geared to that, our way of pricing, how we market, how we run our various divisions. Until recently, the Mass business was not in food at all, apart from Makro. It will integrate very easily within our structures.

The riots in July damaged 231 of your stores. What was going through your head when it played out? How much damage do you feel it has done to SA?

PE: It's going to take us a decade to recover. When those trucks were burnt on that Friday night, I immediately knew that trouble was coming. We had our first ops meeting on that Sunday at 4am and come first light on Monday, we had choppers in the air. I probably didn't sleep more than an hour at a stretch for two weeks. We were running flat out to try to protect our assets; fortunately, we did not lose one of our distribution centres and [that] allowed us to recover much quicker. It was incredible, the level of execution from the Shoprite team in being able to reopen a completely destroyed store in six days. I spent quite a few hours in those choppers myself, and I estimated the loss at R50bn, what I saw with my eyes. I can't say it's not going to happen again, but I think the country will be better prepared.

Are you fearful of a skills exodus, which becomes especially acute when you're throwing a lot at developing the digital side?

PE: Ja, I am concerned about it. People like Amazon in the UK offer 1,000 just as a joining fee, everybody's running almost for the same talent and some of these software installers that I worked with recently said the tech talent in SA is of the best in the world.

Checkers Sixty60 saw 1.5 million downloads this year. Is this ahead of where you hoped you'd be with it?

PE: Originally I just asked for two things: first, everything must be about the customer experience; and second, I wanted to make money out of it, it's not a charity business.

They've achieved both, which I'm very happy with. I think we're further than where we thought we'd be, and every time we hit another Covid wave, like the third wave now, we've seen record numbers there. Sometimes it's difficult to deliver on demands, we're adding more capacity, speed et cetera, but I think we're ahead because of Covid.

RETAIL ROUND-UP Woolworths vs Pick n Pay vs Shoprite vs The Spar Group Weekly - based to 100 200 190 - Woolworths - Pick n Pay 180 Shoprite The Spar Group 170 160 150 140 130 120 110 100 90 Aug Jan Apr Jul 2020 2021 Source: Infront