Good news for Checkers, Pick n Pay, and Woolworths

South Africa’s major retailers are set for a revival after battling load-shedding, inflation and increasingly fierce competition over the last few years. 

This was explained by Kamal Govan, portfolio manager at Allan Gray, on the Kaya Biz podcast. 

He said before Covid, there was “a sense that the general economic environment in South Africa was stagnant, or slowing at best.”

At that time, the retail space in the country became more competitive, with giants like Shoprite and Pick n Pay butting heads more. 

“Obviously, when economic growth slows, you’ve got to look at other avenues for growing.”

“Mix that with some missteps by some of our retailers on the food side, and you can see divergent fortunes.”

Growth also slowed for these retailers’ clothing segments, pushing them to look at different avenues for growth. 

“Some, like Woolies, went to Australia, which proved to be a mistake, whereas others started snapping up smaller local businesses.”

However, recently there has been a turnaround for South Africa’s retail sector. 

According to Govan, the big thing driving the current retail revival in South Africa is the easing of load-shedding.

“It costs these companies an absolute fortune to run those generators. It’s not as simple as closing those stores, especially the food retailers who have perishable goods and fresh foods on their shelves and in their fridges.” 

This break in load-shedding means that these retailers have more cash available, which they can direct to other avenues. 

“Positively, some of them are actually reinvesting that into their pricing,” he said.  This means the consumer is also benefitting. 

In retail, as stores become more competitive and increase their sales volumes, they also have more bargaining power with their suppliers.

This means they can ask for better pricing and discounts, which then get passed on to their consumers. 

Even with the spike in food inflation, Govan said that South African retailers did a pretty good job in managing their internal inflation at or below the headline inflation. 

“That gives you a sense of how important these companies think that pricing is.”

Managing the dynamic between inflation and affordability is essential in a very scale-driven industry like retail. 

Lower prices help consumers on the ground, and because of this, they will be more loyal to the company.

Where a certain retailer’s prices are more competitive than stores’, it also helps to draw in new customers. 

This is essential in South Africa’s current retail environment, which has ecome so competitive that the only way companies can grow is by eating into each other’s market share. 

With the possibility of lower food inflation in the near future, retailers also need to work to remain competitive. 

While lower food prices might sound good for consumers, they could hurt retailers’ revenue if sales volumes don’t increase, Govan explained. 

“The retailers are exposed to underlying inflation in their costs, so that’s a dynamic they have to carefully manage going forward.”

While this retail revival may be a good sign for both retailers and consumers, these businesses need to manage these challenges to remain competitive and profitable.

Similarly, retail investors also need to remain cautious. 

While there’s been optimism following the formation of the Government of National Unity (GNU), the key will be how well they execute plans and achieve economic growth.

Share prices of major retailers have rallied recently, but the question now is, at these current prices, what expectations are built into these stocks?

For these prices to make sense, there needs to be progress on economic reforms, easing infrastructure challenges, and overall improvements. Without these changes, achieving strong returns may be difficult, he added.

Interestingly, Govan pointed out that despite the recent boom in grocery delivery services like Checkers Sixty60 and Woolies Dash, it may not be as lucrative as many think.

While some businesses claim that this segment has been profitable for them, others have been breaking even or making losses. 

Govan explained that for this convenient delivery service to be successful, it needs to be incremental to the retailer’s in-store sales. 

While Checkers has been focussed heavily on this segment with their Checkers Sixty60 delivery service, it has been less of a priority for Pick n Pay. 

For Woolworths, it falls somewhere in the middle.

Overall, Woolworths operates differently than the other major retailers in South Africa, specifically going after the country’s high earning market.  

“The Woolies food business is a very unique food business, not only in South Africa, but also globally.” 

“It’s actually a wonderful food business, they obviously cater to a very narrow segment, or the upper end of the market in South Africa.”

Govan explained that although South Africa’s middle class has shrunk in recent years if it starts growing again, that will be very positive for Woolworths.

Other retailers like Checkers, which has also started selling its own private label products aimed at higher-income shoppers, will also benefit from this.