The impact of load shedding on Shoprite’s profits

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FIFI PETERS: We are getting into the last numbers for today’s show, and these are the numbers that came from Africa’s biggest grocer, Shoprite, reporting strong sales in the period [the six months to 1 January], almost an 18% increase in sales.

But it said that growth in profits and dividends couldn’t match sales growth because of the huge load-shedding bill it had to incur, a bill of over half a billion rand.

We have CEO Pieter Engelbrecht on the Market Update for more on the numbers. Pieter, thanks so much for your time. I see load shedding stole your thunder, essentially. But I’d like to understand what this could mean for profit and dividend growth going forward, given that the power cuts and the power outages are going to be with us for some time still.

PIETER ENGELBRECHT: Yes, we did report that additional spend for the first six months was R465 million. I can tell you that January was north of R150 million.

So unfortunately none of us can guess what it is, because there’s a quite a huge difference in severity between Stage 6 and Stage 4, as an example.

But the thing that is probably more alarming is the fact that a lot of us [miss] that the total value chain is impacted.

It starts with the farmer who can’t irrigate, the abattoir that can’t slaughter in time. That’s why restaurants or the fast-food industry can’t take the birds anymore, because the birds are now too big. There’s no chicken. There’s the direct cost of the diesel, the extra maintenance.

And a big one is the food wastage that is primarily driven by an unplanned interruption. If you are halfway with food production, that food needs to be wasted, and it ends with something that a lot of people don’t think of.

It’s like security costs — the fact that you don’t want to be in my parking lot when it’s dark, and there’s no street lights.

Then there’s the criminality factor in South Africa. [Criminals] are opportunists and also are exploiting the situation as it is.

So all of this adds up to the cost. That’s why we have taken a very conservative approach. Part of the dividend [decision] also is the fact that we’d rather be conservative than disappoint towards the end of the year.

All in all, we are still doing what we can. We have invested a bit in prices, giving relief to what I believe is a very distressed customer currently. We can talk more about that. But I’m still very proud that team Shoprite could deliver to consumers over R7 billion in extra savings at till point during the six months.

FIFI PETERS: I was going to say, in the value chain that you’ve described and how many people are impacted, it is ultimately the consumer who’s having to pay a lot more for food as a result of everything that’s going on, including some of the demand and supply factors in the market. So what can you tell us about food inflation, then, and perhaps how different the picture would’ve looked if the finance minister had given food retailers like yourselves some respite in terms of the diesel rebate?

PIETER ENGELBRECHT: Okay, let’s start with the rebate. We’ve been working on this thing for quite some time because jokingly I’m saying …

‘I don’t see generators driving in the street. So if they’re not driving in the street, why do we have to pay the Road Accident Fund levy of R2.18/litre?’

That’s 10% of the cost. So if I say R150 million a month, I mean that’s a 10% saving, and that is 10% that we can pass on to consumers and help us absorb some of these costs.

Then of course I’ve seen a lot of the manufacturers coming out with their results showing fairly good sales figures, but also not very good profit numbers, because we just cannot give all of the cost increases through to the consumer. It’s not possible. So we still do what we can from what we believe our responsibility to be.

I’m very proud to say that we are still selling a loaf of bread for R5. We have 30 meal solutions of R5 as our responsibility to consumers. And with the current wheat prices, you can imagine what such a subsidy is costing the company. But we just absolutely have to do it.

With the taxi fare of R50 a single trip, that’s R100 if you come to us and back, and if you are on a R350 grant, how are you going to make it with that R250 you’ve got left?

So we are very conscious of that position of our consumer, hence we had a slight reduction in our gross profit margin.

But in here maybe something I would just like to highlight is the fact that our other income line, just below gross profit, is growing by 43%, and those are the alternate sources of revenue that we’ve created over the last seven years.

That’s things like our data monetisation, our Rainmaker Media business, and our partnership with OUTsurance – to list but a few. One has to look into that in conjunction because I don’t think the consumer really cares if we are having a promotion on chicken, whether that comes from other income or comes from gross profit.

FIFI PETERS: So what then are you saying to us about prices? And inasmuch as you have invested significantly – R7 billion in prices to try and keep them competitive – how long should we, as consumers, expect food inflation to remain elevated for?

PIETER ENGELBRECHT: I don’t see runaway inflation, but I do see it in the mid-teens for still an extended period.

FIFI PETERS: All right. So higher than the current 13% that Stats SA has reported, or around about that area?

PIETER ENGELBRECHT: Yes, 13%, maybe hitting 15%, around about there.

FIFI PETERS: Okay. Quite tight. Peter, I think it’s also notable that in this environment of increased cost pressures that you have continued to grow market share. Your consumers are still coming through to Checkers, to Usave, to Shoprite. I’d like to find out from you about how it is that you are managing to increase market share in an environment that’s still tough.

PIETER ENGELBRECHT: Yes. It’s now 46 months, virtually four years of uninterrupted market-share gains for the group.

And what is very pleasing for us is that it’s in both of our consumer brands – in Shoprite and in Checkers in equal measure. I would like to say that it’s the team Shoprite, the level of execution, the access and richness of the data that we have in terms of our decision-making, and the fact that people come first – and that is our customers.

We don’t really watch too much what other people do. We focus on what our customer needs are, and what our colleagues’ needs are.

So when I say ‘people’, we look at our customers and our internal people.

And the combination of the attention to the people and their needs, I believe, combined with the execution ability of Shoprite, has been able to produce this result.

We have invested heavily over the last seven years in terms of our system of records, etc, our investment in digital, and we have stuck almost entirely to our strategy that we set out six years ago.

FIFI PETERS: Okay. And you’re still creating jobs in this environment, you’re still hiring. Is that prospect looking positive still, going forward?

PIETER ENGELBRECHT: Yes. We are planning to open over 400 stores for the full financial year.

Of course that’ll create a significant number of staff or employment opportunities. We have for the [past] six months created almost 4 000 new jobs. Also, good to say that Sixty60 since it started has created just under 8 000 new job opportunities, and shopriders are by far the largest contributor to the YES [Youth Employment Service] programme. So job creation remains a key focus of how Shoprite believes we should assist the economy.

FIFI PETERS: All right, Pieter. Good to know. Those jobs are much needed in this environment. But we’ll leave it there for now, sir. Pieter Engelbrecht is the CEO at Shoprite.