Shoprite pushes posh nosh in bid to win affluent customers
As SA slides into recession and households have less and less to spend, Shoprite is adopting an unlikely strategy: pushing upmarket.
While the lower-income families that have long been its core customers cut back, the spending of wealthier classes remains undented by the downturn. The discount retailer’s new boss is driving hard into the upmarket, higher-margin niche dominated by Woolworths.
Shoprite CEO Pieter Engelbrecht said affluent areas and customers were where he saw growth in the market.
"A lot of those [wealthier] customers, 2-million of them, actually frequent our stores already, but not exclusively," he said. "Our job is to get a better share of their wallets when they are in our stores and then impress them so that they come back again."
Shoprite is doubling its offering of the kind of high-end convenience foods Woolworths has built its reputation on — from gourmet lamb shanks and oxtail stew to teriyaki-and-ginger-basted pork ribs. Its range would reach about 500 products by the end of 2017, Engelbrecht said.
The mainly discount retail group is executing this strategic shift by expanding its higher-end Checkers chain of stores.
It plans to open 23 new outlets, mostly in wealthy suburbs, by June 2018 to bring the number of stores to about 230.
Shoprite’s core, low-income customer base has been battered by a year of high inflation, stagnant wages and unemployment reaching a 14-year peak. Higher interest rates and currency depreciation have further eroded consumers’ disposable income. SA has fallen into recession for the first time since 2009, data showed last week.
The group’s push upmarket has been driven by its own economics. It is grappling with an internal inflation rate — the rise in what it pays for its goods — of 7.4%, the highest level in years, but has not been able to fully pass this increase on to poorer consumers.
This has undermined its traditional mass-market strategy of low margins and high volumes. To continue to secure growth, it is hunting the healthier sales growth on offer at the higher end of the market.
While sales at Shoprite-branded stores have grown by 8.8% in the past 12 months, sales at Checkers have risen by 11.1%.
"The Checkers supermarkets have reported low double-digit sales growth over the last three years, growing well ahead of the Shoprite brand, which supports management’s ambition," said Investec Asset Management analyst Unathi Loos.
The Woolworths and Shoprite groups also variously encompass the likes of furniture and clothing. Woolworths Foods’ margin is about 7%, according to the company’s financial reports.
Shoprite does not separate the margin on its supermarket food division from the financial services products offered in-store, but Loos said the consensus view among analysts was that the figure was between 3.5% and 4%.
Shoprite did not immediately respond to a request for comment on the food margin figure.
Shoprite, which is 16% owned by tycoon Christo Wiese, has grown from eight supermarkets in 1979 to a no-frills mass-market grocer with operations in 15 African countries. Woolworths, which is more than 80 years old, morphed from a clothing chain into SA’s fine-foods market leader in the early 2000s. Engelbrecht took the Shoprite reins in February from Whitey Basson, who had led the group for 37 years.
Part of his strategy is based on a bet he can lure affluent shoppers away from Woolworths with high-quality convenience products priced below those of its rival. "Woolworths over time has constantly moved the price of [those products] up and up, because they were virtually the only players in that market, which gives us the opportunity to come in," Engelbrecht said.
Asked about Shoprite’s push into upmarket convenience food, Woolworths said it had an "incredibly valuable emotional connection" with its customers.
"Retail is a dynamic environment and the competition in the grocery and food market category means that we will always keep a watching brief on our competitors’ activities," it said. "We conduct weekly basket checks against the prices of competitors to ensure that our prices are comparable."
Analysts said the clash between the two was unlikely to develop into a price war because that part of the market was not as price-sensitive as the lower end. But Woolworths would be forced to respond and would likely push back with new products and pack sizes.
"They have been good at introducing new products and other innovations in line with consumer trends and feedback," said Old Mutual Invest food retail analyst Kaya Nodada.