Shoprite Selling Property to Pay for Online, Store Upgrades

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Shoprite Holdings Limited’
s decision to sell some properties and lease them back is to free up cash to invest in technology, growing online sales and upgrading supermarkets to offer more fresh food.

These are the kinds of investments that give us very good returns, Chief Executive Officer Pieter Engelbrecht, said in an interview after Africa’s biggest grocer reported first-half earnings growth on Tuesday.

Global retailers are increasingly leasing rather than owning real estate because “the heavier your property portfolio gets in your total asset base, the lower your return on invested capital becomes,” the CEO said. “So eventually we become more of a property company than a retail company.”

According to Bloomberg News, Shoprite launched online purchase with one-hour delivery last year and is converting about 80 Checkers stores to its produce-focused FreshX format. With almost 30 outlets already upgraded, the remainder will be completed over the next two years.

“We can’t ignore where the world is going and customer data is critically important for the future of retailers,” Engelbrecht said. “We now know much more about our products, our margins and our customers.”

Shoprite has made big strides in its offering of more expensive specialist food, an area dominated in South Africa by Woolworths Holdings Ltd.

“In the premium fresh section of our business we’ve added 350 million rand ($23 million) in market share,” Engelbrecht said. “The customers that we’ve profiled as premium buyers in our fresh stores are growing 3 1/2 times faster than in the rest of our business, so we are certainly attracting a more affluent customer more often.”

Shoprite has an almost 32% market share of all food sales in South Africa, but Checkers — the brand that offers the most high-end products — has about 10%. “It has lots of runway still to grow its market penetration,” the CEO said.

Shoprite has responded to the virus outbreak by reducing supplies from China and transferring orders to countries such as Ukraine, Turkey, India and Bangladesh. The company expects to lose about 100 million rand in sales from being inadequately stocked.

That won’t really move the needle now, but we don’t know where the effects of the virus are still going to go,” Engelbrecht said. “The first batch of products ordered from Chinese factories for South Africa’s winter are already too late. Even if they start manufacturing today the full quantity will come only after winter has passed.”

“It’s been an overwhelming reception from customers,” Engelbrecht said. “We still have lots to learn and our systems weren’t designed from day one with that in mind.”

“We will expand in urban areas and we are going to try and get as good at this as quick as possible,” he added. “In the next three months we just want to learn a bit and make sure the platform is stable and then from July we will scale it.”

“We’ve got absolutely beautiful stores there, but they’re not doing the volume I expected,” the CEO said. “With the attacks having happened there it means you have to have head-to-toe searches every time you go in and out a supermarket — and that’s hampering customer flow.”

“It’s not that easy a country to do business, but it’s got all the right macroeconomics, so it’s up to us to get the assortment right and then potentially increase beyond the four stores.”

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