Investors were disappointed at the yearend results released by Shoprite today, at one point knocking 8% off the share price. During our CNBC Power Lunch interviews today Old Mutual’s Jeanine van Zyl was distressed at an apparent zero growth in profits for non-SA Africa while RECM’s Jan van Niekerk pointed investors at the slump in the bottom income market at home. But as CEO Whitey Basson explained when visiting our studio this afternoon, all is not quite what it seems. Strip out the accounting anomalies and one-offs and, he says, you’ll discover  it’s clear African growth continues apace. Indeed during the coming year Shoprite will invest more heavily in Africa than in SA for the first time. And would Shoprite consider buying Ellerines? Whitey answers right at the end of the interview. – AH
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WHITEY BASSON: I think the market expects better than what we produced but then, we are really in a market where the majority of our stores are still in South Africa. And when South Africa grows at two percent, we grow at ten percent, and outgrow our peers then on the top line, we didn’t do that badly. Where I was disappointed was on the operating line, which does not actually reflect the true position. I think that went out very late, the figures I gave you just to look at. That was disappointing but not a factor that will stay with us because it is exceptional items, in most cases and it shouldn’t affect our long-term projections on the growth of Shoprite. The good news is that Africa is starting to move forward faster. We’ve allocated about R1.5bn (in development capital) to Africa, and substantially less to South Africa for next year.
ALEC HOGG:Â Is that the first time that you are spending more outside of South Africa?
WHITEY BASSON: Yes, definitely, also with the new stores now, I think we’ve got something like 117 stores either in construction, being, designed, and waiting for final approval for land etcetera, for the first time in Africa, which effectively means that Africa will start moving faster. It has in fact, this year moved faster. We’ve already got a growth of Africa, they are at 24 percent in profit, if you also do the adjustments, and do the actual figures.
ALEC HOGG: Let’s just dwell a bit on that, on the adjustments because talking to (Jeanine van Zyl) the Analyst from Old Mutual; she said the biggest disappointment was Africa with zero profit growth in the second half of the year. These adjustments that you’re talking about, just explain them to us.
WHITEY BASSON: If you look at the trading profit of non-RSA, it was, reported to be about R673 but there were management fees in excess of R189m, compared to R151m, which is the fees that we pay for transfer pricing to SA Revenue Services, because the companies have large loan accounts and not large capital basis. It’s purely a situation of rectifying the amount of money that should come to South Africa as interest, or not. Then there were these infamous corrections, which you now, they work if you have a lease now, it is divided by the length of the lease, and it’s a straight-line basis, which effectively means that you will pay the same, or you will write off in your P&L, over the period of the lease a constant figure. That was another R29m. If you take the Nigerian cash deposit fee, what happened there is that for about four months Nigeria’s Central Bank said that all cash that we pay to the banks, we should pay then an extra three-percent, because they wanted the people out of cash and into credit cards.
That has now been, reversed because it was not a very good decision in the first place. Then obviously, there were some, I think some R3m or R4m from the South African card holders, which sneaked in a card between the credit and the debit card, which was a sort of hybrid card, which was then ruled out by the South African Reserve Bank. As from January, we’ll get a replacement of that, or a cost saving that of R100m.
ALEC HOGG: So there’s a lot of bits and pieces there but if you strip them all out, you get like-for-like?
WHITEY BASSON: Then you’ll (get Africa) up 24 percent, from seven-point-three to nine-point-one.
ALEC HOGG: All right, so the second half of the year was not flat. The second half of the year was strong.
WHITEY BASSON: No, it’s purely a situation as year-end adjustments are, made on all these accounting procedures that, as we call it, period 13.
ALEC HOGG:Â The point was, and it was Jeanine van Zyl from Old Mutual, but the point she was making was that people buy Shoprite nowadays, on the Africa story.
WHITEY BASSON:Â Yes.
ALEC HOGG: So if the Africa story seems to be running out of steam then there’s a reason to be concerned but you are saying ‘that isn’t the case’.
WHITEY BASSON: No, I will send Jeanine a correct copy and say ‘just look at the adjustments that we have to make, in terms of accounting policies, and what things happened’. In fact, it is going to be positive next year. That down from R20m-odd will be R100m plus next year, just on the card situation.
ALEC HOGG: Something else that was interesting, we spoke to an analyst from West Africa in the same program on Power Lunch today, and he was saying that there’s an infinite runway for you, in Nigeria, that Shoprite is doing a lot to formalise the shopping experience in that country. Are you seeing it the same way?
WHITEY BASSON: Well, I think we’ve now reached the critical stages where we can actually sit down with the suppliers and get the same sort of volume discounts and discounts, which we haven’t been able to get in the past. Most of the suppliers were reluctant to actually spend brand money as I call it, and rather supported pavement trading compared to formal trading, which obviously, formal trading has a lot of advantages for them. It’s now a question that if we don’t get the support from the brands, we’ll just create our own brands because we dominate the formal market now.
ALEC HOGG: And the entrance of Tiger Brands into that market. Has it had any impact?
WHITEY BASSON: No, not really. Tiger Brands was brave and I think they’re going to do very well in the future, so they took that decision and they’ve gone into an economy that is bigger than South Africa. It has virtually the same disposable income and grows at eight-percent. If I was an examiner for ‘what’s his name’, which one would you have to choose, then I would support Tiger on that basis as well.
ALEC HOGG: Isn’t it interesting though. Every time a company goes into Nigeria, a South African company, they get criticised. MTN was a prime example. Tiger Brands have taken a lot of criticism lately. From your perspective, when you moved aggressively into Africa, did you find asset managers were not impressed?
WHITEY BASSON: Well, nobody likes the unforeseen or the stuff that you can’t really lay your hands on, and tried and tested and being the same in South Africa is obviously the safest bet that you have. We took a decision that we want to grow Shoprite at a certain pace, over a certain length of time, and Africa was an obvious choice for that. There were no fears, and no areas that we were worried about. Maybe we had a good relationship with our track record with them, and most certainly, nothing has changed. I think everything in Africa has improved for us.
ALEC HOGG: The other comment on the results was, watch out South African lower income market because if Shoprite can’t get it right, if Shoprite is struggling in that area, then there will be many others who are having the same experience. What’s your reaction to that?
WHITEY BASSON: Well, my reaction would probably be, don’t be cross with Shoprite. Go and find the guy that you should be cross with. I don’t want to mention names but find the bloke who you should be cross with.
ALEC HOGG:Â Is it really tough at the bottom end?
WHITEY BASSON: I think so, yes. The problem, and we’ve all seen the furniture disaster that’s happened here, but it really originates, not because people hate to pay. People, in fact, are not bad payers by nature. People don’t buy stuff and just walk away and don’t pay for it. The fact of the matter is there’s a 25 percent unemployment ratio and people, when they have got no money and no income, and then wife has a baby, and they have to buy a bed, they’ll buy it on credit and not pay. It’s not a function just of dishonest people or people who didn’t want to buy or Credit Managers that were just too smart to not, see that something is coming up there. It is really a situation if we don’t improve the employment situation in South Africa, we will have that continuously or people just won’t get credit, but South Africa, generally has a grant of credit, in terms of world terms. As a percentage of GDP, is not that out of line with anybody else.
ALEC HOGG:Â You did very, well buying OK Bazaars, for R1.00.
WHITEY BASSON:Â Yes.
ALEC HOGG: You’ve got Ellerines who presumably are about the same value right now. Would you look at it?
WHITEY BASSON: I never say that I won’t look at anything or never look at anything but what is important to know is that Ellerines, whichever way it goes, if it’s sold to somebody, shops will come available and we would probably be interested in new shops for OK Furniture. It is under spread in the market. It does very well or well, at the moment, so yes, if there are stores that will come around and landlords that want to re-let, we’ll look at it.
