Shoprite: Fuel for Thought

Shoprite: Fuel for Thought

08 September 2023

Key Indicators

Index / Fund / Rate Start of Year Last week This Week % change YTD
Lunar BCI WW Flexible Fund 141.43 179.66 181.20 28.12%
JSE ALSI 73 049 74 787 73 653 0.83%
NASDAQ Composite 10 467 14 032 13 762 31.48%
S&P 500 3 840 4 516 4 457 16.08%
Prime Lending Rate 10,50% 11.75% 11.75% 11.90%
USD/ZAR 16,98 18.85 19.13 12.66%
EUR/ZAR 18,44 20.31 20.45 10.90%
Brent Crude ($’barrel) 85,95 88.92 90.27 5.03%

Source: Iress

Weekly Stocktake with Danyaal

Shoprite: Fuel for Thought

Shoprite, the grocery retailer, has seen a consistent rise in market share in recent years. The latest results for 2023 demonstrate the success of their expansion efforts. Sales for the Shoprite group in 2023 increased by 17.1%, reaching a total revenue of R219.5 billion. Despite a high inflationary environment, Shoprite’s gross profit also saw a notable rise, reaching R51.7 billion for the year. However, the overall profit for the year saw a more modest increase of 2.8% to R5.9 billion, mainly attributed to diesel costs incurred during loadshedding and delays in finalising the acquisition from Makro.

Shoprite’s results provide valuable insights into the true state of the economy. Through their Xtra Savings loyalty program, Shoprite gathers extensive data, boasting 10.6 million participants in the Checkers program and 17.2 million in the Shoprite program. This enables Shoprite to gain a thorough understanding of individual buying habits and their evolution over time. Given the challenging economic conditions, consumers have been actively seeking better prices. Shoprite has addressed this by offering cost-effective bundled deals to consumers.

Upon the release of the results, a notable focal point was the diesel cost for Shoprite’s group, amounting to R1.3 billion for the year. This marks a significant increase from the R0.2 billion spent the previous year. Retailers generally operate on narrow profit margins, with Shoprite’s net margin standing at 2.7% for the year. Retailers contend with the dual-edged impact of operational leverage. Efficiency improvements in their operations have an amplified effect on net profit in relative terms. Conversely, factors like the increase in diesel costs have a substantial negative impact. The diesel costs shaved 18% off Shoprite’s potential profits.

During the earnings call, there was limited discussion regarding plans for the implementation of long-term power solutions, such as solar. One possible reason could be that Shoprite leases the properties it utilizes from third parties, like shopping malls. Thus, negotiating lease agreements with property owners may be the stumbling block.

At Lunar Capital, we like Shoprite. We believe that their recent results reflect positively on their ability to engage with customers across various income brackets. Their emphasis on expansion, coupled with their efficient central distribution model, allows them to maintain competitive pricing for consumers.

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