All’s right at Shoprite
Whitey’s retirement, while an end of an era, will unlikely mean radical changes in local retail, writes Colleen Goko
There is little that James Wellwood "Whitey" Basson hasn't seen or done during 40 years in the retail business.
At the height of racial tension in SA, in the decade of the Soweto Uprising, Basson was the head of operations at Pep Stores, an office he held until late 1978.
Pep Stores was one of a few South African corporates which made an early decision to focus on the low-income market despite the politics of the day. Black consumers could go to Pep and dress their children from head to toe for less than a rand. Basson’s key role in the young organisation — founded in 1965 — was to extend its brand and reach.
His time at Pep revealed Basson’s ambitious nature. Having tasted the fruits of success after acquiring his first business Half Price Group and turning its fortunes around through integration into Pep, Basson felt ready to start a new venture in the food retailing business.
With Pep’s blessing, he did just that and 37 years ago acquired an eight-store Western Cape grocer named Shoprite from the Rogut family. The legend as we know it had begun. From a business with a value of just R1m, Shoprite now has a market capitalisation of R114bn.
Basson changed the game. Apartheid had fractured the nation along the lines of racism as well as wealth distribution. His street smarts did not discriminate. The formal retail sector in townships and rural areas was underdeveloped by years of neglect. The government of the day also made it extremely difficult for black business minded people to begin their own formal and legal enterprises.
Consumers in those regions relied on local spaza shops for their needs and goods. The offerings were usually not fresh and prices could vary. The market was ripe for the introduction of a formal player offering good service and products at reasonable prices. Dominant players in grocery retail had ignored this demographic before apartheid and were slow on the uptake even when it ended.
Shoprite, under Basson’s guiding hand, snatched the carpet from under the feet of the major retailers. Pick n Pay, OK Bazaars and Checkers were focusing their strategies and attention on middle and upper-income consumers. With the country just finding its feet, that target market was feeling the pressure. OK and Checkers were soon swallowed up into the Shoprite Holdings group.
With the changing consumer landscape, Basson understood that the only way to become one of the biggest players in the sector was through aggressive acquisitions and to have exposure to as many segments of the market as possible. But he and Shoprite never lost focus on their core market.
Basson was also a pioneer in introducing a centralised distribution centre, which allowed the group to stabilise supply lines when supplier service levels dropped. More tellingly, he was the only food retailer ambitious and hungry enough to expand into territories elsewhere in Africa.
With SA open for business to the rest of the world, after the first democratic elections, Shoprite was quick to open its first store in the rest of the continent — in Lusaka, Zambia. This at a time before the "Africa rising" narrative. Shoprite now has operations as far north as Nigeria and Ghana.
As Shoprite chairman Christo Wiese says, Whitey’s charismatic leadership and calculated risks spearheaded the group into a leading food retailer on the continent. Other retailers have tried to mimic the strategy but it has been too little too late.
The retail landscape has changed since Basson was first appointed Shoprite CEO. The news of his impending retirement at the end of the year, while signally an end of an era, will unlikely mean radical changes in the local retail landscape.
While shopping centre developments have been increasing rapidly in SA, Shoprite will likely continue to dominate. Since the 1960s, the number of retail developments in a decade has been increasing by an average of 36%.
A Euromonitor report says Shoprite led South African grocery retailers in 2015 with 19.4% market share. Its expansive retail network across grocery retail channels such as supermarkets, discounters and hypermarkets gives it a competitive advantage. Shoprite is also positioned as a low-priced retailer, so in tough economic times, consumers continue to be attracted to Shoprite by the promise of low-priced products.
The company’s first-quarter trading update of the 2017 financial year points to exactly that. The group reported strong double digit growth across most of its divisions. Group revenue grew by 15.7% compared with the prior year. Its South African supermarkets increased revenue by 12.4% — greater than the 12.1% growth in SA food retail sales. The most plausible explanation is that Shoprite gained market share in the period under review.
Though Africa may be in the midst of a slowdown, the region will recover and Shoprite is well positioned to capitalise when it does. Having come early to the party, it is better shielded than latecomer competitors. In the first quarter, non-South African supermarket revenue increased by 35.1%. In constant currencies, revenue grew by 55%.
Importantly, Basson, along with the rest of management, ensured there was a succession plan in place that would keep the company’s winning formula. Shoprite announced that Pieter Engelbrecht, current chief operating officer of the group, would be taking over with effect from January 2017.
Arqaam Capital says the move to place Engelbrecht at the top makes strategic sense. "This ensures consistency within the group as Shoprite’s strategy should be maintained with no major changes in the company operations expected. This is positive for the company but not a surprise."
Basson will also be around to act as a sounding board to Engelbrecht and the senior management team as he will remain on the Shoprite board as nonexecutive vice-chairman.
But with the 70-year-old no longer in the ultimate seat of power, the emerging market retail sector could be in line for a shake-up if rumours of a possible tie up between Shoprite and Steinhoff are to be believed.
Talk has been rife since 2006 but nothing has come of it. Shoprite would not fit the profile of a Steinhoff acquisition. Exane BNP Paribas analysts say Steinhoff usually targets localised retailers with strong brand awareness, which can be complemented by Steinhoff’s supply chain. Target businesses would usually be "underearning" or, in some cases, distressed.
In Investec’s analysis, Shoprite would add 47% to Steinhoff’s estimated revenue for its next financial year, and 27% to its operating profit. But the devil would be in the structuring.
The only thing they have in common is their largest shareholder, Wiese, who has a 16% holding in Shoprite and 18% in Steinhoff. Though his 16% stake doesn’t seem like much, he controls 50.9% of the retailer’s voting rights through 291m deferred shares. Wiese is on record saying a merger would give Shoprite an international balance sheet. The merger would unite Wiese’s retail assets after Steinhoff’s R82.8bn acquisition in 2014 of clothing retailer Pepkor from Brait — another firm where Wiese is the top shareholder.
A merged Steinhoff and Shoprite would have a presence in more than 40 countries. Walmart, the world’s largest retailer, has more than 11,500 stores globally, while a combined Shoprite and Steinhoff would have 92,111 stores in Africa, Europe, the UK and Australasia.
It is sad to see Basson go but there’s nothing to suggest his exit will cause a seismic change in the local supermarket sector, which is why the share price reacted well to the news of his retirement.
As the man himself said: "Given the quality of Shoprite’s management team and their track record I foresee the company will continue to grow from strength to strength. I look forward to being a sounding board for Pieter Engelbrecht and his team as they take the company forward and continue the high standards we have always set ourselves as the supermarket with the lowest prices and the highest level of customer satisfaction."