Most of the Shoprite executives attending the group’s annual general meeting in October 2017 were dressed in black. They were participating in the countrywide demonstration of support for the 19,000 people murdered during the year.

As it happened, that dress code turned out to be a chilling harbinger of what CEO Pieter Engelbrecht describes as "the toughest year I can recall", during which Shoprite had "been to war".

They had the scars to prove it. Financial 2018 was the first time in 20 years that Shoprite had reported a drop in its full-year earnings.

Basic headline earnings per share, the key measurement of the supermarket group’s profit, were down 5.2% to 969.6c — uncomfortably off the 1,090c forecast by analysts.

"I don’t want to ramble down a long list of excuses," Engelbrecht told analysts at a results presentation on Tuesday, before itemising a nerve-wrackingly long list of excuses.

These included chronic unemployment, weak consumer demand, industrial action, service delivery protests, record fuel prices, a VAT increase, the first sugar tax, a listeriosis outbreak, the rollout of updated reporting systems and 489 armed robberies.

All of that was on top of a collapse in contribution from its previously most profitable foreign market, Angola, and food price deflation in SA. It was not a good time for Shoprite to be undertaking the largest capital expenditure programme yet by an SA retailer. In the past two years, the group forked out R10bn on capital expenditure, and Engelbrecht says there are no plans for a slowdown over the next two years.


Shoprite is refurbishing existing stores, establishing new stores, developing a centralised warehousing system and information systems.

Not everyone believes this is the way to go. Analyst Nick Krige says management’s decision to ramp up capex several years ago has seen Shoprite’s return on capital slump from more than 30% in 2012 to about 20% currently.

"For two years in a row the group has spent over R5bn a year on capex, and despite this hefty spend, in the six months to end-June 2018 profit was at the same level it had been two years earlier," says Krige.

He questions why the group is continuing to pump money into capex "when there does not seem to be that much coming back".

By contrast, in financial 2018 Pick n Pay spent R1.6bn on capex, down marginally from the R1.8bn spent in each of the previous two financial years. Pick n Pay’s return on capital employed increased from 20.6% in 2014 to 32.6% in 2018.

But slowing down capex is not an option Engelbrecht is prepared to consider. While he says the revamp of five hypermarkets would not have been undertaken had management known how tough trading conditions were going to be, spending on IT and centralised distribution are non-negotiables. "It’s something that has to be done. We don’t slow down because we see a blip."

Engelbrecht acknowledges that in this tough environment there has been some cannibalisation with new store openings, but notes that due to its enviably plum margins Shoprite generated more than R8bn in trading profit in 2018.

Jean Pierre Verster of Fairtree Capital says that with the benefit of hindsight, Shoprite may have overinvested in recent years, but few people could have foreseen the deterioration in trading conditions. He says most of the investing has been in multiyear projects relating to distribution centres and IT.

"The benefits of the capex will be evident when trading conditions improve," he says.

Sasfin analyst Alec Abraham says he got a bit nervous when Shoprite was at the height of its store expansion programme, but believes the commitment to growth will pay off.

"They have built a massive and efficient sales platform and are well placed to benefit from even small improvements in trading conditions," he says, noting that even small increases in the top line will benefit the bottom line. He reckons Shoprite’s capex commitment will not only help it fight the war-like conditions referred to by Engelbrecht, but recover more speedily once it is over.