David Shapiro: “Huge resistance to SA” in Aus, frets about Woolies bid
Many, many South African companies have tried to make a go of things in Australia, and very, very few have succeeded. Despite their best efforts, Australia has simply proved to be a tough nut to crack. Yet Woolworths has decided to take a giant gamble on the country, purchasing luxury retailer David Jones. It's an interesting move. Not only is Australia historically a difficult place for South African companies to do business, but the Australian economy is also looking a little ropy. While Australian consumer spending has recovered from its post-2007 slump, the outlook for the economy is relatively subdued. Unemployment has been ticking up, and growth will be subdued for the next few years. That means that Woolies is likely to have a tough time of it as it tried to bed down the acquisition and adjust to operating in the Australian environment. It's certainly possible that the acquisition will pay off down the line, but it seems that, for the next couple of years at least, we should not expect fireworks. – FD
ALEC HOGG: Well, let's get a more in-depth view of how the market is trading today. David Shapiro from Sasfin Securities is with us in the studio – as usual, on a Wednesday – although you tell us you're off, Dave, for a while.
DAVID SHAPIRO: It's Passover. I'm going to spend Passover in New York with my grandchildren, and then I'm off to Buffett. I'm off to the AGM in Omaha where I'll see you. I'm off to a value investor conference as well. I think this is my eighth year in a row, so I call it financial rehab. I learn a lot. Every year I go there, asking why I'm going. Every year I come back with some new insights into the market.
ALEC HOGG: David, you know Australia well. You have a brother who runs a huge stockbroking firm there. You have a son who works in one of the newspapers there. Tell us about David Jones.
DAVID SHAPIRO: David Jones is the equivalent of Selfridges – very high-end. It's an aspirational store – stores within stores. If you really want to buy the top end of the market, that's where you go. When you walk in, you see all the cosmetic counters…you go down below onto the ground floor basement there, they have the food hall there, very similar to Harrods or Selfridges. That's the kind of store. I enjoy it. Australia's an expensive place. I am, however, worried. What I'm concerned about is consumption in Australia. The economy has been under quite a lot of pressure. They're pulling interest rates down. The second thing is I can't get my head around Woolworths, which I always regard as a Marks & Spencer type of operation versus the Selfridge's type of operation. I'm not sure how they're going to blend the two. I have great respect for Ian Moir. In fact…Country Road, Trenery. I love their stuff. I think they have great value for money here, but I'm not sure, how all of this is going to come together and where the benefits are going to come. Alec, I have to add one thing as well. The big fear in the market at the moment with retailers is the two companies Zara and H & M, who are coming in and taking the world by storm. I think everybody's trying to protect themselves against that kind of model, especially where it comes to fashion or young fashion. We have to hear from Ian what this all means and why they're doing it.
GUGULETHU MFUPHI: Remember, last year Woolworths mentioned that they're moving out of Nigeria, so for them to move out of a higher-end market, doesn't it perhaps make sense – moving towards more of a Richemont kind of model?
DAVID SHAPIRO: Definitely. That's where they are. They need the rich. They need people at the upper end of middle class. That's where their market is and certainly, David Jones is there. That's where David Jones operates and even if you go into Woolworths' stores today, their food is at the high end of the range. This is not a Shoprite.
ALEC HOGG: It's a big bet, Dave. This is a third of the market cap.
DAVID SHAPIRO: I'm not arguing against it.
ALEC HOGG: South Africans haven't done well in Oz. Who has done well in Australia – which South African company? Maybe RMB at the moment, with Outsurance – perhaps.
DAVID SHAPIRO: Bidvest has done okay. It took a long time, but it's a different…
ALEC HOGG: Pick & Pay got a hiding.
DAVID SHAPIRO: Twice.
ALEC HOGG: Imperial got a hiding.
DAVID SHAPIRO: Twice.
ALEC HOGG: There's just about any number…Ceramic got a hiding. Wherever you look South African companies that have gone into Australia… It has been a long hard struggle for Woolies anywhere, up to this point. To go and do a big deal like this…no wonder the market is taking perhaps, a little bit of a cautious approach.
DAVID SHAPIRO: On a combined value, this will be about 20 percent of their market cap. It's a good name, Australians love it, they love to shop there – or they love to try to shop there. What's the shape of Woolworth's store going to be like? What's the shape of a David Jones store going to be like? Is it behind the scenes perhaps, where administrations take them? Is that where the benefits are going to be made or where they're going to retain their brands? I can't answer that.
ALEC HOGG: There is a Woolworths in Australia already, which is more downmarket than the Woolworths we have here.
DAVID SHAPIRO: That's different. That's more a Shoprite-type operation.
ALEC HOGG: It's a fascinating move, given that Woolies has hung in there. As I was saying earlier, I recall when I visited some years ago, when Ian Muir was still running Country Road, there was huge resistance to the South African connection and to Country Road itself, which I think, was about almost 90 percent owned by Woolworths back then. There were some politicians too, who were saying 'get rid of these people. Let's get them out of our country. Now they're coming in with an icon…an iconic acquisition.
DAVID SHAPIRO: I don't want to say it, but when you go there, there's a huge resistance against South Africa. You're dead right. There's huge resistance. I went to a little restaurant called the Tsotsi Café or the Tsotsi Shebeen – it was like a shebeen, and beautifully done. The chap who owned it said one of the big issues we have is that the Australians don't like to come there because it's South African food. South Africans, somehow, have gotten up their noses for reasons I don't know, even though there are some very successful operators there.
GUGULETHU MFUPHI: Why is that? In Africa, we are considered very arrogant. In Australia…what's the perception out there?
DAVID SHAPIRO: There might be a certain arrogance, which South Africans have. They walk with a certain swagger. Australians are a very egalitarian culture. The postman can talk to the Prime Minister. It's the same thing. There's no difference. However, South Africans don't feel the same way.
ALEC HOGG: But Ian knows the country. He worked there for a long time. He knows the business he's looking at. Let's wish him the best of luck. Dave, outside of that…I suppose that's dominated the news today, hasn't it?
DAVID SHAPIRO: Look, the market's strong. We are just short of an all-time high. We might even get there later. I think that the big news was yesterday's IMF report – I think – America leading the way. The other one was Nigeria as well, causing a few ructions here and there. Business are doing okay. The markets are all right. I don't have the sense of a sell-off. The big worry is, are we due for a 2000-type correction on the top end of our market…mainly in information technology? It's not the same, Alec. There, there were so many new listings. Companies were just so overpriced. I don't see it. I think this market still has legs and it's not time to sell.
GUGULETHU MFUPHI: Looking at some of the news headlines recently, it does seem as though there's potential for consolidation to take place in the mining front: the likes of Gold Fields eyeing Amplats' assets in the platinum sphere, as well as Exxaro looking there, too.
DAVID SHAPIRO: I think so and I think that's all against China, which is growing at seven-and-a-half percent, and doesn't have the appetite for commodities, as it had. We're still trying to find out whether Billiton's going to sell off those assets or not. We're not quite sure. We can't make headway.
ALEC HOGG: Do you know the Australian story on that one?
DAVID SHAPIRO: No.
ALEC HOGG: It's one coming out of the Australian media – and it reinforces what we were talking about Woolworths.- is that they're going to unbundle Billiton., so they send back the South African assets to a separate listing.
DAVID SHAPIRO: Yes, I know that.
ALEC HOGG: They keep the Aussie assets in BHP. They don't like us – those Australian guys.
DAVID SHAPIRO: I don't know the source, but there is a certain animosity. Even Marius Kloppers…he was South African, with a broad South African accent and he hated South Africa. He would never appear here. He would never be seen here and was always anti-South Africa.