Economies of Scale key to Shoprite’s Success

As Zambians, we all love Shoprite. From its wide assortment of groceries, this chain of stores offers a dynamic yet consistent family shopping experience for many of its customers. Originating from South Africa, the group has been embarking on an aggressive campaign of expanding its network of stores across Africa. Stability in the economies they venture in, is key to scale expansion. Therefore, it is no surprise that Chairman Wiese lauds the success the group has had in Zambia.

Shoprite’s stock on the LUSE ranks top above all others. Important to this success is how they have gradually grown the number of local Zambian suppliers of vegetables to 80% of what goes through their stores. Imagine, if this was extended to other locally manufactured products? However, a threat to this success is the rising inflation and deterioration of the Kwacha against the dollar.

Now why is this stock so strong? Well, efficiency has been key to their success. Working capital is positive and they have a cycle that ensures they collect within 30 days. An acid test on their current assets (less inventory) vs. current liabilities signals a company that may have interesting discussions with its suppliers as the amount of inventory they hold impacts on their ability clear immediate debts. So if you are doing business with then, read the fine print of the terms and conditions on when they will pay you. However, its return on non-current assets is in the mid 30% implying that they need to do more work in sweating their assets. This is expected as value generation through scale entails massive investments in stores and other fixed assets.  

The groups gearing is in the low 20% giving them enough room to employ more capital for expansion in Africa. Notably, although they indicate reaching maturity in terms of growing their network in Zambia, they are pursing interests in Nigeria and Angola. However, caution is necessary in pursing growth in economies that have macro environmental head winds such as the plummeting of commodity prices, ill infrastructure and devaluation of currencies.

The groups return on equity and capital employed are at 22% and 25% respectively. This is good news for investors and makes the stock worth holding because at the end of the day, we all got to eat something from Shoprite J.