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Evan Walker, an analyst at 36ONE Asset Management, and Piet Viljoen of Counterpoint Asset Management weigh in on Shoprite’s decision to exit the Nigerian market. The conversation also touches on management dynamics after Pieter Engelbrecht took over from Whitey Basson. They joined Alec Hogg on the BizNews Power Hour to unpack just what makes the rest of Africa such a challenging environment for South African businesses.
On why South African retailers are making mistakes when moving into the rest of Africa and Australia:
“It’s obviously just chasing growth. And we’ve seen a bloodbath across most companies on the market that have done such a thing. Remember when we saw Priceline, which was a Clicks business back in the early 2000s in Australia – they were clever enough to exit. And that’s been probably one of the success stories in South Africa, staying in South Africa, growing your business in an environment, and expanding your customer base accordingly.
Unfortunately for Pick ‘n Pay, I think it cost them north of the three billion range in the end. And that’s obviously not the opportunity cost of that money invested back in South Africa over the period of time. So there’s been a very, very expensive acquisition strategy. As for Shoprite, I think it’s been a tough call for them despite what they’ve said there.”
On paying for goods and getting money out of Nigeria:
“This is a very difficult jurisdiction to run. I think the biggest issue for all these guys in Africa is just purely currency now, just getting money and actually just paying for your goods and services. I think it’s the be-all and end-all in Africa. If you look at MTN etc., it’s all around dividend expatriation and actually just paying for capex and growing in these jurisdictions. And that is just so tough for these guys. I think a new management team on board… just obviously not the enthusiasm to stick it out for the next 10 years. It does surprise me they are exiting at this point in the cycle.”
On why Shoprite’s exit from Nigeria was a surprise for some:
“Well, they did announce well over 12 months ago that they were exiting already… When we knew we were getting a barrel of oil for nothing. So it was in an environment [where] obviously Nigeria [is] very dependent on its oil revenues. It seemed to be a bit of a knee-jerk reaction. I’m not saying it was. Having discussed it with Shoprite, it doesn’t seem to be the case. But it just seems to be at the bottom of this cycle in the throes of a global economy in the doldrums. And you would have expected to wait for a bit of an up cycle before that. They’ve been there so long. I mean, look, I think that in the north of 15 years now… I know it’s a long time now and there’s a lot of capital deployed there now. It doesn’t seem the optimum time to be selling that asset.”
On the ‘Rest of Africa’ strategy for retailers:
“They say it’s just a Nigerian issue… but I tend to think that Africa is a branch and a big branch, and that takes a lot of capital and it takes a lot of manpower and it takes a lot of people to manage that type of infrastructure out there. [When] you exit a big region, I think it puts a lot of pressure on the other regions to make returns at a head office level. Given the amount of capital, the amount of resources that are allocated there… Pulling back from a big region like this tends to signal to me that they’re not really… Angola is really going to be the next one. They’ve been struggling to repatriate money there. They have a lot of cash. They’re getting a bit out, but it tends to signal to me that the heart is not in it.”
On the negative perceptions that are created when large companies exit Nigeria, which could deter investment:
“Nigeria has been a tough place to operate. It’s a tough regime to operate. It’s a tough, tough environment. And then they’re not very user-friendly when it comes to business. It does send the wrong signals. I don’t think South Africa per se is sending out the right signals to the rest of the world either. But Nigeria doesn’t send the right signals and it’s certainly an environment where you haven’t seen the likes of big global companies coming to really lay down a lot of capital. That’s exactly what they need. It’s not sending the right signals to the rest of the world and certainly not for African and South African businesses on the continent.”
On what happens in boardrooms when big decisions are made, such as Shoprite’s exit from Nigeria:
“I do think it deals with personalities and risk tolerances. Obviously, Whitey had a significant tolerance for risk… He took on and turned around the ailing OK and Checkers brands in the early days. I think environments have changed, there’s no doubt. But I’ve got to give it to them as well.”
The online retail challenge in South Africa:
“I think there’s a significant new challenge in terms of South African retail, and that’s obviously online retailing in South Africa. And I think they are ahead of the pack in terms of route to market from a home delivery point of view. I’ve got to give it to them that there is an opportunity set in South Africa, which I think they can better pursue. Maybe they have looked at their capital allocation that’s sitting in Nigeria… I think there’s a big opportunity to do something with that in South Africa.”
New dynamics in management after Whitey Basson’s departure:
Piet Viljoen: “They would have come to the board with a very well-thought-out strategy. They probably don’t have the appetite to fight the next 20 years to make something work there, and they probably came with a very well motivated strategy and convinced the board to back them. And that’s probably what happened. That’s normally how it works in these sort of situations. And there would have been a bit of debate. But generally, the board would back management.”
On which South African retailers they would be confident holding:
“[We’re] a little bit nervous in the short term to be honest. The amount of stimulus that was pumped into this country last year and obviously all these interest payment holidays etc. – the banks granted really did pump a lot of consumer money into the wallet last year despite Covid. So our estimate is close to nearly R200bn of additional funding, whether it was through grants, additional grant income, or just deferred payments that came to the South African consumer in 2020. So we’re a little bit nervous about that base. We are holding Shoprite and we do think it’s the better of the retailers. We held a lot of TFG. We do think it’s getting a little bit expensive and we’ve begun to exit that with this base effect. But retail has had a storming start to the year. Up 26, 27% on the index. And we certainly haven’t followed most of that. So we’re lagging a little bit at the moment, but we’ve been a little bit negative on the outlook for the consumer in South Africa.”
Piet Viljoen: “Shoprite is probably one of our biggest holdings in the value fund… I think in this sort of environment, if you want to be in retail, you want to be in food retail. I think it’s a good inflation hedge and it is a business that sells stuff that people need every day. So we quite like Shoprite.”
- Shoprite to focus on domestic market after withdrawing from rest of Africa
- What price a lifetime’s work? – Whitey Basson’s R1.8 billion nest egg
- Life after Whitey Basson: Complexity overshadows Steinhoff, Shoprite proposal
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