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Big five fight for food market share

The battle for the biggest slice of South Africa’s R220-billion food retail market is hotting up, with the Shoprite Group and Massmart in front and Pick n Pay, Woolies Food and Spar on the periphery.

But as much as Massmart chief executive Grant Pattison, with his global partner Walmart providing the main ammunition, fired the first salvo by publicly declaring a price war, Shoprite Group chief executive Whitey Basson launched a crafty expansion plan that will likely advance his group way beyond his rival’s reach.

In July, Massmart-Walmart launched a 10-week price-cut promotion, which it claimed saved South Africans more than R50-million. The two million food and 230 000 general merchandise items sold during the promotion were all produced in South Africa, it said.

In October, it extended those discounted prices to December 4, an overt charm offensive to woo the cost-conscious consumer — a tactic, now a trademark, Walmart has successfully used globally.

In South Africa, Basson, who confidently disclosed his group’s healthy state of affairs in the interim results this week, is perceived as the brand ambassador of cheap products. For the first quarter ended September 2011, the group increased its total turnover by 10.8%, a real growth of 7% in spite of overall weak economic demand. Its core business, Supermarkets RSA, also grew turnover by 10.8% with internal food inflation averaging 4%.

Basson did not appear to be a man under threat, clear in his message that Shoprite would continue to grab market share from its rivals. “Our confidence is supported by the increase in basket size ahead of internal inflation and the positive growth in customer numbers,” he said this week.

The South African food retail market is highly concentrated, with five main players accounting for about 60%. Analysts estimate Shoprite owns about 36% of the formal market and is growing, followed closely by Pick n Pay and Spar, each with 28%. Woolworths Food has about an 8% share, which is growing, Walmart’s Cambridge Foods ­probably has no more than 2%.

The expansion story will dictate who will lead the charge. Though Walmart faced the most bruising legal battle of any foreign company to gain entry into South Africa, the winner of the supermarket war will be the one with the most stores.

Renewed focus
Drilling down to the numbers, it is almost a no-contest. Basson will roll out 74 new supermarket stores during the next eight months to June 2012, entrenching his group’s dominance in the formal market. Of those, only 10 will be outside South Africa — of which four will open in Nigeria and the rest will be in other African countries. So, the renewed focus is on the domestic market: 23 new Shoprite supermarkets, 12 Checkers-Hyper stores and 29 Usave stores.

Massmart’s expansion, on the other hand, is a moving target and pales in comparison. Stores being built at the moment — two Makros, six Game stores, four DionWired stores, seven Cambridge Foods, one Builders Warehouse, two Builders Express stores and a Builders Trade Depot — are expected to be open for business within eight months.

Nedbank Securities retail analyst Syd Vianello said another 16 stores would be added to the Cambridge Foods mix from the acquisition of Rhino Cash and Carry, which Massmart was still finalising. “After that transaction, they would own just more than 40 food stores.”

Massmart aims to increase its exposure to food retailing through two conduits — Game Foodco and Cambridge Food. Game Foodco intends expanding food penetration in Game stores to 40% of turnover in the medium term and Cambridge Foods targets the lower end of the market, focusing on fresh produce.

But Vianello was sceptical. “That’s not nearly enough of a statement to make in the food retail space.”

That was especially so when you consider that, at the end of June, there were 331 Shoprite stores in South Africa, 189 Usaves, 154 Checkers and 26 Checkers-Hypers. “So Walmart-Massmart with its Cambridge Food will be competing against Shoprite Group’s 520 stores in South Africa,” Vianello said. “For Cambridge to become a meaningful player here, it would have to roll out a lot more very fast. I can’t see how that could happen.

“Apparently Massmart-Walmart tried to buy the independently owned family Pick n Pay franchises. “But when Pick n Pay heard about it, they fast approached all their franchisees and made appropriate new deals with them so they don’t sell out,” Vianello said. “I don’t see Walmart and its Cambridge Foods as a material threat to the other food retailers.”

Shoprite would continue to own the bottom of the market for many years. “At the end of the day, Basson has been preparing for competition for 20 years. He already dominates. All he’s doing is fine-tuning by putting down stores in the right places. Shoprite is in a particularly strong position and Basson will continue to push the perception that he is the cheapest.”

In reality, Shoprite might not be the cheapest — studies indicated that Pick n Pay had the cheapest basket of goods. But, Vianello said, consumers bought based on perceptions.

“The price perception by the consumer is that Shoprite is the cheapest,” said Vianello. “As much as Walmart is who they are internationally, Massmart will have to make some very serious acquisitions and serious roll-outs in food distribution for them to catch up with Shoprite. It could take 20 years.”

Absa Capital’s retail analyst Chris Gilmour had a different view. He believed Walmart would shake up the sector.

“Basson is up against the biggest retailer in the world. Walmart’s buying power is enormous through the world. It’s about the volumes. Shoprite and Pick n Pay will find it very difficult to source the same international suppliers as Walmart.”

Where Walmart will score is through the R100-million suppliers’ fund it has set up as part of its entry obligations to do business in South Africa. It aims to procure R60-billion in fast-moving consumer goods, mostly locally, over the next five years. “They will be cutting out many middlemen, who introduce the massive price differentials.

“Everyone in the supply chain is taking a cut,” said Gilmour. “Massmart will be establishing a range of suppliers in South Africa and bring cheaper prices.”

It is going to be a fascinating scramble to watch. Can Pick n Pay stop the bleeding in terms of lost market share? Shoprite has the biggest profit margin of all the retailers and so has ammunition to cut prices. Basson will be looking to preserve market share.

Pick n Pay has a new turnaround strategy to regain lost share, including a fresh centralised distribution network, technological innovations and store expansion.

But there is no doubt Massmart will increase its presence. The question is: Who will they take it from?

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