At no time during the past two decades has the Shoprite Group been worth so much more than the Pick n Pay Group. The extent of this deviation is shown below, highlighting that much of the change in relative value has occurred in the past three years.
We’re calling out Pick n Pay to highlight the outperformance of Shoprite because it’s the latter’s closest and long-time rival, but we could make similar assessments about Shoprite against many other listed South African retailers.
Given this extreme deviation in market values, some investors are likely to be banking on a reversion of this trend, perhaps expecting this reversion to be driven by better trading and market share gains by their preferred retailer?
This report intends to account for some of the drivers that have caused the disparity in fortunes between Shoprite and other grocery retailers and to highlight flags that investors can look out for when evaluating if competitors are making up ground.
We do this by looking at the spending of a panel of 22seven users over the past two years. Analysing the same users over time eliminates user churn from the results. Then, to allow us to attribute changes in spending to different types of customers, we add a new dimension to the analysis: loyalty.
A user is loyal to, say, Pick n Pay if more than 45% of their total grocery spend over a period goes to a Pick n Pay branded store. Loyalty helps to group customer numbers based on their preferences for certain stores. More importantly, it allows us to evaluate where growth comes from.
The logic is simple. A retailer attracts spend from three groups of customers: those who regularly shop at the store; those who previously bought groceries from a competitor; and those who tend to shop around.
By attributing change in spend in different time periods to these three groups of customers, we can see which types of shoppers are accounting for growth at the retailer.
Let’s begin by explaining our method. We started by comparing how spending by the 22seven sample has grown compared to the reported numbers from the major grocery retailers. These are shown in the chart below.
The blue columns show Insights’ best estimate of the reported (actual) growth in sales at each retailer for the two years ending March 2023. The red columns show the growth in spending at each retailer for a very large sample of 19,170 shoppers who are also 22seven users, for 1Q23 compared to 1Q21.
Three things about this chart: the sample of 22seven users is likely to overestimate growth at Checkers and Woolworths, and also overestimate the weak performance at Pick n Pay. However, our Spar growth-rate data is similar to what the company has reported. Importantly, the sample data corresponds with the main growth trend: Checkers significantly outperforming Pick n Pay.
At the same time, we can use our sample to unpack additional trends that are not available to company outsiders, while being cognisant of the differences between the sample and the national population.
This is important because, as the next chart highlights, the divergence in spending growth at the major grocery retailers over the past two years has been extreme.
For example, aggregate grocery spending by users earning R25–R60k pm increased by 22.1% over the two years* between 1Q21 and 1Q23 (i.e. 10.5% pa CAGR). For reference, official food inflation increased by 21.9% over the same period.
However, what is significant is the enormous divergence in growth between retailers. In the same R25–60k pm income bracket, user spending at Checkers increased by 47% over two years, while spending at Pick n Pay declined by 7%.
What explains this discrepancy in growth rates?
To attribute growth, we grouped users based on their loyalty in the 1Q21 starting period. As mentioned earlier, a user is loyal to a retailer if 45% or more of their total grocery spend in a period goes to that retailer. A few further points on loyalty:
- A user can be loyal or have no loyalty.
- A user can only be loyal to one retailer – we take the maximum loyalty in the rare cases where a user spends more than 45% of their total grocery budget at more than one retailer.
- Loyalty is evaluated across eight predominately grocery-based retailers. Insights further distinguishes expenditure by channel and format. For example, our analysis of Pick n Pay may include spending at Pick n Pay supermarkets, and spending at its Clothing, Liquor, asap! and online channels. We have not included Boxer, which is a separate retailer in this analysis. For Spar, we include Tops, Spar2U and Spar supermarkets. Checkers is made up of Checkers stores and Checkers Sixty60.
- Woolworths includes grocery and clothing spend because Insights cannot reliably distinguish from user transactions whether purchases are in the Food or the Fashion, Beauty & Homeware (FBH) divisions. 70% of Woolworths South Africa’s reported revenue is from its Food division, and our other investigations have suggested that Food accounts for the majority of 22seven user spending at Woolworths. Furthermore, over the period of the analysis, the two years between 1Q21 and 1Q23, we estimate very minor differences in the reported sales growth of Woolworths Food and FBH divisions.
Our analysis finds that there is always some churn in loyal customers shifting between retailers, or customers shifting to ‘no loyalty’. The following chart tries to visualise this dynamic process over the period of the analysis.
Can you guess which retailer is which?
We’re delighted you’ve read this far. But research is only valuable if it’s exclusive. To be fair to the retailers and investment teams who subscribe to Insights, we have to say goodbye before we get to the juicy bits.
Contact us find out how our research can help you.
Simon Anderssen
simon.a@22seven.com
+27 84 730 0309
