Shoprite has sold its furniture business, enabling it to bet on sectors with relatively higher growth prospects, such as the township retail economy, pet products, and clothing.
After Shoprite’s 2024 financial year results were released, Pepkor revealed it had bought the company’s furniture business for R3 billion.
The business has around 400 stores and is comprised of OK Furniture and House & Home.
“There’s a lot more one can extract out of that business, and it’ll require significant capital investment,” Shoprite CEO Pieter Engelbrecht said.
Given its investment in the relevant technology, Pepkor will be able to integrate the purchase seamlessly, “and it allows us to appropriate the capital where we are enjoying a much better return,” he said.
Analysts agreed with Engelbrecht’s assessment and the company’s willingness to allocate to areas that offer the highest potential growth for Shoprite.
Christele Chokossa, research consultant at Euromonitor International, explained that this marks a shift from Shoprite’s strategy of rapidly diversifying its portfolio by tapping into new industries.
For example, in recent years, the company has made a big push into clothing with Uniq, pet retail with Petshop, and Little Me baby stores.
Although the strategy might help boost revenue in the short term, it might also become a burden in the long term as it affects the company’s ability to scale and strengthen its core capabilities, Chokossa said.
Therefore, stepping away from House & Home and OK Furniture to bet on underpenetrated industries may prove more lucrative for Shoprite.
In particular, its move into the township economy with Usave has reaped significant returns for the company.
Chokossa said other areas, such as Pet Shops and clothing, can provide equally large returns for Shoprite in the coming decades.
On the other hand, acquiring Shoprite’s furniture business might allow Pepkor to build scale and leverage its expertise within the industry to better position itself against growing competitors like The Foschini Group.
Old Mutual Wealth Private Client Junior Research Analyst Bianca Lakha said the sale of the furniture business has the potential to unlock shareholder returns shortly.
The furniture segment is a relatively tiny part of Shoprite’s business, only contributing 3% of Group sales and is growing slowly at only 2.3%.
To scale the business to a point where it would move the needle for Shoprite would require significant capital and resources, which could have a higher return on investment in other segments.
Shoprite already generates some of the most attractive margins in the retail sector, and spending billions on its furniture business may have threatened these.
Ultimately, disposing of the furniture business can boost Shoprite’s cash generation, which could be invested in more profitable sectors of the business or returned to shareholders.
Following a period of high capital expenditure, management are now focused on business optimisation, market share gains and balance sheet “right-sizing”, Lakha explained.
This should improve free cash flow and unlock shareholder returns over the medium term, while investments in key sectors could boost growth over the longer term.
Lakha said Shoprite is also set to benefit from multiple headwinds in the coming year.
The implementation of the country’s new two-pot retirement system is set to increase disposable income for South Africans and thus boost consumer spending.
Shoprite is well-positioned to capture this value across its brands.
The broader outlook is also promising for the South African consumer, with inflation declining and interest rates expected to be cut. Again, this should free up cash for consumers to spend.
“We believe that Shoprite is well positioned across all segments of the market to continue gaining market share and driving growth,” Lakha said.
“The group’s expansion into higher margin adjacent categories is expected to grow and sustain margins. We view the partnership with Discovery Vitality and the sale of the furniture business as positive.”
“That said, the shift into a lower inflation environment and the inclusion of lower-margin stores will likely see a deceleration in earnings growth momentum. This is reflected in our valuation.”