War between Checkers, Woolworths, Pick n Pay, and SPAR

South Africa’s four largest grocery retailers are preparing for increased competition. To remain competitive, they need to balance innovation, operational efficiency, and customer satisfaction.

According to Allan Gray portfolio manager Jithen Pillay, South Africa’s four largest players are all trading in a highly competitive marketplace.

SPAR, Shoprite, Pick n Pay and Woolworths are battling it out in an industry where customers, both at the high and low end, remain price-conscious.

Pillay said that while Shoprite, Boxer and 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 said.

One key trend emerging from the local retail industry pandemic is customers’ need for convenience through online shopping.

“Ever since Covid-19, we have seen a shift from quality to convenience, with many customers converting to online shopping,” he said. 

Online grocery sales have grown by 54% a year since 2019, hitting R23 billion in 2023, with the trend expected to continue.

However, Pillay pointed out that this can be a double-edged sword for retailers – while online sales are important, they don’t make them a lot of money. 

“In the early 2000s, retailers moved towards a centralised distribution model, which made them far more efficient,” he said. 

“The online delivery model unwinds that and disaggregates it. The centralised benefit gets diluted with additional picking and delivery costs.”

He explained that, for every R100 spent at a grocery store, only R6 or R7 equates to profit for the retailer because of high operating costs.

Introducing online sales increases these operating costs and, in many cases, can wipe out any profit the retailer would have made.

A Daily Investor analysis in March this year showed that Pingo, the logistics powerhouse behind Checkers Sixty60, seems to lose money on most of its single orders.

This is because, at the time, the driver’s total remuneration is more than the R35 delivery fee the platform charges customers for these orders.

“Yet, it’s still important to retailers, with Checkers’ Sixty60 being the best example of online grocery shopping.”

He explained that retailers are investing in it because they realise that customers value an omnichannel experience where they can shop in-store or online.

Another key trend emerging in the local grocery retail sector is adjacency, which refers to retailers expanding their offerings by entering 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,” Pillay said.

“Adjacency is about identifying who your core customers are and finding ways to sell more to them.”

For example, Woolworths is rolling out its food offerings, specifically its W Cafes, because they’re seen as a key driver of 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,” he explained.

“In this way, Woolworths can claim a higher share of the customer’s wallet.”

An interesting example of adjacency gone wrong emerged in the local market earlier this year when Shoprite announced its plans to sell its furniture business.

CEO Pieter Engelbrecht said in an earnings statement that they had found themselves at a crossroads. 

He explained that the business’s future growth and profitability were hindered by the need for significant investment, which would have diverted capital and project management resources from their current food retail operations. 

Therefore, Shoprite decided to sell its furniture business to allow the retailer to focus on its other offerings.

In terms of investing, Pillay says that Shoprite is an expensive share to own right now. 

“Other shares, like Pick n Pay, Woolworths and SPAR, are looking more attractive, and even though they all have turnaround strategies in place, they are not without risk,” he said.

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

However, Pillay warned that a real danger is when retailers get complacent and fail to do 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 said.