A turning point for SA’s retail sector?

By all accounts, South Africa's four largest grocery retailers are preparing for increased competition. “Spar, Shoprite/Checkers, Pick ‘n Pay and Woolworths are all trading in a highly competitive marketplace where customers, both at the high and low end, remain price conscious,” asserts Jithen Pillay, portfolio manager at Allan Gray.

He says while Shoprite/Checkers, Boxer &Woolworths Food have been the relative winners recently in capturing market share, the other retailers have struggled to keep up.

“However, there are encouraging signs of growth in the industry. The key question is how sustainable this will be” he states.

Online sales continue to soar
“Ever since COVID-19, we have seen a shift from quality to convenience,” comments Pillay, “with many customers converting to online shopping.” Online grocery sales have grown by 54% a year since 2019, hitting R23 billion in 2023, with the trend expected to continue.

But while online sales are important to retailers, they don’t make them a lot of money, argues Pillay. “In the early 2000s, retailers moved towards a centralised distribution model which made them far more efficient,” he says. “The online delivery model unwinds that and disaggregates it. The centralised benefit gets diluted with additional picking and delivery costs.”

For every R100 spent at a grocery store, only R6 or R7 equates to profit for the retailer because of high operating costs, Pillay explains. “Online sales increase operating costs and, in many cases, wipe out any profit the retailer would have made,” he says. “Yet it’s still important to retailers, with Checkers’ Sixty60 being the best example of online grocery shopping, and retailers are investing in it because they realise that customers value an omnichannel experience where they can shop in-store or online.”

Adjacency trend
Another key trend is adjacency, meaning retailers expand their offerings by moving into new segments. “An example is Spar opening their own pharmacies, Shoprite branching out by having their own clothing stores and Woolworths having their own cafes,” comments Pillay.

“Adjacency is about identifying who your core customers are and finding ways to sell more to them,” he says. “In the case of Woolworths, they’re rolling out their food offering, specifically their W Cafes because they seem them as a key driver in increasing footfall. By creating an enjoyable experience having a cup of coffee at the restaurant, customers are encouraged to go into the store and buy. In this way, Woolworths can claim a higher share of the customer’s wallet.”

Danger of complacency
In terms of investing, Pillay says that Shoprite is an expensive share to own right now. “Other shares, like PnP, Woolworths and Spar, are looking more attractive, and even though they all have turnaround strategies in place, they are not without risk.”

In the near term, higher economic growth should translate into more money in consumers’ pockets and more retail spending, he asserts.

“But a real danger is that retailers get complacent and don’t get the basics right to see a turnaround. They need to keep investing in their stores, prioritise their customers and increase efficiencies at the backend of the businesses, while getting both product availability and pricing right,” he concludes.