INSIGHT-South African supermarket giants in fine food fight


Reuters

* Discounter Shoprite drives hard into upmarket niche
    * Sets stage for a turf war with rival Woolworths
    * Low-income shoppers cut back as recession hits
    * But spending of wealthy has held up in downturn

    By TJ Strydom
    JOHANNESBURG, June 19 (Reuters) - As South Africa slides
into recession, and households have less and less to spend, the
number one supermarket group Shoprite is adopting an unlikely
strategy: it's pushing upmarket.
    While the lower-income families that have long been its core
customers cut back, the spending of the wealthier class remains
undented by the downturn.
    In a bid to retain its leading industry position, the
discount retailer's new boss is driving hard into the upmarket,
higher-margin niche dominated by rival Woolworths <WHLJ.J>.
    The stage is set for a turf war to win the hearts, minds and
wallets of South Africa's richest 2 million households - and
ultimately preeminence in the supermarket sector.
    Shoprite CEO Pieter Engelbrecht told Reuters that affluent
areas and customers were where he saw growth in the maturing
South African market.
    "A lot of those (wealthier) customers, 2 million of them,
actually frequent our stores already, but not exclusively," he
said in an interview. "Our job is to get a better share of their
wallets when they are in our stores and then impress them so
that they come back again."
    Shoprite is doubling its offering of the kind of high-end
convenience foods that Woolworths has built its reputation on -
from gourmet lamb shanks and oxtail stew to teriyaki-and-ginger
basted pork ribs. Its range will reach around 500 products by
the end of this year, Engelbrecht said.
    These products typically cost about 200 rand($15) for a
meal for four - 10 times the minimum wage of 20 rand an hour as
set by new labour laws making their way through parliament.
    As part of the drive to expand its range, Engelbrecht said
Shoprite had upgraded its food technology and development
facilities and gone on a hiring spree for food developers and
technologists. He said the department had grown 10-fold in a
year, without giving more specific details on staff numbers.
    The mainly discount retail group is executing this strategic
shift by expanding its higher-end Checkers chain of stores.
    It plans to open 23 new outlets, mostly in wealthy suburbs
such as Waterfall City north of Johannesburg, by June next year
to bring the number of stores to about 230.
    Checkers has for years been underrepresented in the
wealthiest neighbourhoods with the most spending power,
according to analysts.
    New Checkers stores, and established ones that have been
refurbished, resemble Woolworths outlets with sparse lighting
and wood-panelled sections boasting extensive wine and gourmet
coffee selections, as well as counters selling quality
selections of cheese and meat.

    NUMBERS GAMEShoprite's core, low-income customer base has been battered
by a year of high inflation, stagnant wages and unemployment
reaching a 14-year peak. Higher interest rates and currency
depreciation have further eroded consumers' disposable income.
    Africa's most advanced economy has fallen into recession for
the first time since 2009, data showed last week, in a slide
that has slowed profits across the grocery sector.
    The discount group's push upmarket has been driven by its
own economics. It is grappling with an internal inflation rate -
the rise in what it pays for its goods - of 7.4 percent, the
highest level in years, but has not been able to fully pass the
increase on to poorer consumers.
    This has undermined its traditional, mass-market strategy of
low margins and high volumes. To absorb the hit, and continue to
secure the growth demanded by investors, it is hunting the
higher margins and healthier sales growth on offer at the
higher-end of the market by expanding Checkers.
    While Shoprite-branded stores' sales have grown by 8.8
percent over the past 12 months, Checkers' have risen by 11.1
percent.
    "The Checkers supermarkets have reported low double-digit
sales growth over the last three years, growing well ahead of
the Shoprite brand, which supports management's ambition,"
Investec Asset Management analyst Unathi Loos told Reuters.
    The Woolworths and Shoprite groups also variously encompass
the likes of furniture and clothing. Woolworths Foods' margin is
about 7 percent, according to the company's financial reports.
    Shoprite does not separate the margin on its supermarket
food division from the financial services products offered
in-store, but Loos said the consensus view among analysts was
that the figure was between 3.5 and 4 percent.
    Shoprite did not immediately respond to a request for
comment on the food margin figure.

    'I LOVE WOOLIES'
    The country's - and the continent's - two largest retailers
have very different backgrounds.
    Shoprite, which is 16 percent owned by retail tycoon Christo
Wiese, has grown from 8 supermarkets in 1979 to a no-frills
mass-market grocer with operations in 15 African countries.
Woolworths, which is over 80 years old, morphed from a clothing
chain into South Africa's fine-foods market leader in the early
2000s.
    Engelbrecht took the reins of Shoprite in February from
Whitey Basson, who had led the group for 37 years. Part of his
strategy is based on a bet that he can lure affluent shoppers
away from Woolworths with high-quality convenience products
priced slightly below those offered by its rival.
    "Woolworths over time has constantly moved the price of
(those products) up and up, because they were virtually the only
players in that market, which gives us the opportunity to come
in," Engelbrecht said.
    A crucial question is how will Woolworths respond to defend
a market that has delivered handsome profits for the company and
whose chief executive Ian Moir said in February its food
business continued to grow ahead of the market.
    When asked by Reuters about Shoprite's push into upmarket
convenience food, Woolworths told Reuters that it had an
"incredibly valuable emotional connection" with its customers.
    "Retail is a dynamic environment and the competition in the
Grocery and Food market category means that we will always keep
a watching brief on our competitors' activities," it added. "We
conduct weekly basket checks against the prices of competitors
to ensure that our prices are comparable."
    Analysts say the high-end clash between the two industry
titans was unlikely to develop into a price war because that
part of the market was not as price-sensitive as the lower end.
    But Woolworths will be forced to respond and would likely
push back with new products and pack sizes, they say.
    "They have been good at introducing new products and other
innovations in line with consumer trends and feedback," said Old
Mutual Invest food retail analyst Kaya Nodada.
    It's a tall order for Shoprite to break Woolworths'
stranglehold. If it is to prevail, it will have to win over
shoppers like JF Fourie.
    "I love Woolies. The microwave meals are a bit overpriced,
but they are tasty," the 28-year-old who works in marketing said
in the Woolworths branch in eastern Pretoria as she added
shimeji mushrooms to the baby brinjals in her basket.
    But Fourie - a big fan of Gordon Ramsay - said she would
need some convincing about the quality of Shoprite's products,
but would give it a go because Checkers adverts feature the
British celebrity chef.
    "I like the chef and he hates airplane food," she added.
"He's fussy and I am too."

 (Editing by Pravin Char)
 ((tj.strydom@thomsonreuters.com; +27 11 775 3150; Reuters
Messaging: tj.strydom.thomsonreuters.com@reuters.net))

Keywords: SAFRICA RETAILERS/ (INSIGHT, PIX)



This article appears in: Stocks , World Markets , Economy
Referenced Symbols: WHLJ


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