LISTED GROCERY RETAILERS PICK UP THE PIECES – AND MAYBE MORE MARKET SHARE
Finweek English|20 August 2021
finweek analyses the outlook for South Africa’s Big Five grocery retailers in the aftermath of July’s riots and looting.
Brendan Peacock

The more information regarding the coordination and organisation of planned attacks on civil infrastructure comes to light, the more the looting and unrest encouraged by individuals politically connected with former president Jacob Zuma seem to have scored an own goal.

If the exponents of radical economic transformation intended to attack so-called white minority capital to create the desired spectacle, the owners of the listed grocery retailers whose assets were pillaged will recover quickly and relatively easily – leaving smaller, independent and largely black-owned businesses that were indiscriminately looted struggling to reopen.

Vuka Chonco, deputy general secretary of the Food & Allied Workers Union, says the union is still – some weeks after what is now being labelled a failed insurrection – not in a position to accurately quantify the fallout from the unrest. “We’re still counting the lost jobs and livelihoods. It will take a while for that to filter through from workers who will lose out.”

Similarly, the SA Property Owners’ Association (Sapoa) has said that 112 shopping centres had been looted and damaged, as had 90 pharmacies. More than 1 000 ATMs, 269 bank branches and 3 931 retail stores had been destroyed, with more than 150 000 jobs placed in direct jeopardy because of the violence and destruction. Sapoa’s research indicated that 50 000 informal traders and 40 000 businesses had been affected.

36ONE Asset Management portfolio manager Evan Walker, who has been analysing the grocery retail sector for 25 years, says the unfortunate and perverse outcome of the unrest and looting is that there may be further market share gains for listed players, who will be insured against profit losses, as independent traders struggle.

“For listed grocery retailers, somewhere between 3% and 8% of their store base was affected. They will be able to bounce back very quickly, given their resources, capital and logistics infrastructure. A small business, which typically is a cash-based business, can also bounce back quickly if not too badly damaged by buying from wholesalers. The one advantage they have is not being so reliant on technology. But if they are waiting for an insurance payout from Sasria, that could take years given that there are 40 000 claimants and every claim must be loss-adjusted before payments can be made,” Walker says.

Grocery retailers are actually in a better position than apparel, furniture and general retailers, where stockholdings are greater than in food, Walker adds. “A small trader selling shoes who loses stock to looting or destruction will not be able to fit out their store as quickly and will need to wait for a payout.”

The most significant challenge and expense grocery retailers will face in picking up the pieces after the looting will be reorganising their supply chains. “Listed grocery chains have large warehouses and distribution centres that come with huge capital investments in IT. Everything in the supply chain of today operates on a just-intime basis and securing that going forward is a way bigger problem than store destruction.”

Achumile Mashalaba, analyst at Ninety One, adds that calls with retailer executive teams in recent weeks have confirmed that – from a bottom-line perspective – there will be little to no material impact for listed players. “From an earnings per share view, there will simply be some extra costs added into the business for cleaning and security, but the more pressing concern that may influence revenue in the medium term is product availability. Suppliers, especially of white-label products, have been affected, with some burnt down and others damaged. In certain categories, we may see some short-term inflationary impact.”

Mashalaba says he fears for independent players who will have no cash flow for months. “I think some small retailers may just take a cash payout and leave either the sector, the country or both. It’s bad for the economy.”

Protea Capital Management senior analyst Richard Cheesman agrees that the looting and damage would not have changed the views of either the profitability or preferences of the investment community, despite the horrific images displayed in the media. “This will be manageable, compared to for example the difficulties that some Chinese companies are currently going through. These retailers are wellrun businesses with strong local operations.”

Walker believes the CEOs of the Big Five in grocery retail – Shoprite, Woolworths, Pick n Pay, Massmart and Spar – will be thinking hard about ways to protect their assets, and distribution centres in particular. “These are billion rand facilities and nobody would have seen this coming. What do you do? Do you allow force to be used on people who come onto your property in defence of shareholder interests, or do you allow them to loot and, at the same time, cause potential starvation of communities? I would say management teams will take some time to develop contingency plans because there is no easy answer, but I expect they will need to develop greater physical security, lay down more offsite IT backups and renegotiate agreements with landlords. It’s important that they get the answers right because these chains are huge employers in South Africa.”

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