Retailers show why Walmart likes SA prospects

By Phillip De Wet 24 August 2011

South African retailers are doing well, judging by results released by Edcon and Shoprite on Tuesday. Not spectacularly well – but good enough, considering that we're not exactly in boom times here. Which implies that when consumers have money to spend again, they'll be doing very well indeed, if the American menace doesn't get there first. By PHILLIP DE WET.

If things keep going this way, Walmart won’t be the last international retail player to come looking for acquisitions in SA. Unless, of course, political interference in that acquisition is sufficient to deter newcomers.

Both Edcon, in unaudited results for the quarter to the beginning of July, and Shoprite, in reviewed annuals to June, showed decent growth in sales and profits, and plenty of appetite for expansion. Between them the two groups cover most of the country, most income groups and a wide range of products, and their recent experience has been remarkably similar. Even amid pressure on disposable incomes and job losses, South Africans are finding the money to spend on food, clothing, and cellphones, even if they’re deferring buying big-ticket durables like furniture.

Shoprite, which is set to have around two-thirds of the population pass through its doors this year, saw a 7.2% increase in revenues at local supermarkets during the course of its year, most of it in cash. Edcon, which now sells more than half its products on credit, reported a 7.3% increase in retail sales across the group.

And that’s not for lack of competition, or based on price inflation. While Edcon didn’t disclose product inflation, Shoprite said its supermarkets were selling 40% of items at the same or lower prices than it did the previous year. Food prices for those supermarkets actually decreased slightly, by 0.1%.

Shoprite calculates that strikes during its financial year cost consumers R1.5 billion in lost wages, money they would have spent on food. But those strikes have a curious effect: those who have jobs, and keep them, achieve above-inflation increases in their wages. That seems to offset somewhat the steady erosion of disposable income. Now, somehow, large swathes of the working population just need to continue receiving such large increases, and all will be well.

Neither Shoprite nor Edcon are concerned about the sustainability of increased spending, though. Both are planning to continue more stores than they close, and Shoprite in particular is full of fighting talk, with new stores and new concepts in direct competition to Walmart planned, and a promise that it won’t be ceding ground in the low-price arena.

It is with tight cost controls and improved inventory management that both groups are making their profits, though. Shoprite improved its trading margin by 14.2% for the year, and Edcon’s retail margin improved 13.6% compared to the same quarter last year.

The one area of concern, and the one place where Walmart and its international buying muscle could really hurt other retailers, was Shoprite’s furniture sales. That part of the business saw a massive average price deflation of 15.7%. In those items that do sell, electrical appliances and televisions in particular, Shoprite said competition was tough. That will likely continue to be the case; as prices decline and lower income earners become able to buy new flat screens, everybody is getting in on the game. It’s hard to imagine that anyone will be able to beat Walmart on price, though, unless they’re flogging TVs that fell off the back of a truck.

Edcon ultimately lost R340 million for the quarter, with all its good operational work wiped out in financing costs. Shoprite, though, showed a net profit of 3.5 cents for every rand of merchandise it moved, for a total of R2.52 billion. By contrast, in its last reported period (six months to nearly the end of December), the now Walmart-controlled Massmart turned a profit of 2.9 cents on the rand. If the two companies engage in the kind of price war and rampant expansion both are heavily hinting at, those numbers will be considerably smaller this time next year. DM

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