Shoprite’s Usave brand has rapidly expanded into South Africa’s informal economy and plans to deepen its presence in townships and rural areas in the coming years.

South Africa’s informal economy is extremely lucrative and has caught the eye of larger, established businesses for over a decade.

Many have tried to expand into the sector and have burnt their fingers in the process, as it is a very unique market that is hard to penetrate.

The informal sector is also vital in meeting the needs of ordinary South Africans who rely on cheap goods and services that are easy to access in townships and rural areas.

In particular, it absorbs South Africa’s large unemployed population, providing many with additional income and a basic livelihood.

It is dominated by spaza shops, which are estimated to generate revenue worth R180 billion annually.

Shoprite has been the most effective blue-chip company in tapping into this growing market through its Usave stores.

Pick n Pay tried its hand through its ‘Traders Welcome’ campaign in 2016, which aimed to get spaza shopowners to source their stock from its stores.

It offered bulk deals to informal retailers but has been outcompeted by Shoprite’s Cash & Carry stores and independent wholesalers.

Massmart’s Cambridge Foods also tried to enter this market but came up short and was sold to Shoprite in August 2021. Shoprite has since converted these stores into a mix of Cash & Carry, Usave, and Shoprite outlets.

Shoprite’s Cash & Carry stores remain dominant in this segment of the market. They offer a fully online shopping experience with free delivery within 50 km.

The market to supply spaza shop owners and independent wholesalers is estimated to be worth R259 billion.

The sheer size of the market is not the only factor attracting companies towards it. Crucially, it is growing at a meaningful rate and considerably faster than its formal peers.


Shoprite CEO Pieter Engelbrecht

While Shoprite’s Cash & Carry stores remain dominant, the company’s real growth engine in this market is its Usave stores.

Shoprite and Usave meet the needs of the company’s core customer base in lower-income segments. In the most recent financial year, these two brands generated sales worth R90 billion, up 10.7%.

Usave, in particular, has shown strong growth as South Africans hunt for value, growing sales by 13.2% – the fastest-growing supermarket brand in Shoprite’s stable.

Usave was launched in 2001 as Shoprite’s way to enter the informal economy. Its primary focus was on townships and ‘forgotten’ towns in rural areas.

Key to the brand’s continued expansion is its relatively new offering, Usave eKasi, which is a container-store format that enables the company to open stores where they were not previously viable.

These small-format stores allow for greater penetration into these underserved communities. This is because they are able to operate where traditional supermarkets cannot, as they require less supporting infrastructure.

The stores often comprise only five or six shipping containers and are highly flexible, quick to open, and capital-light.

Shoprite CEO Pieter Engelbrecht was central to the brand’s expansion in the 2000s and 2010s, driving it to 463 stores across the country.

As CEO, Engelbrecht plans to greatly expand the number of Usave stores in South Africa by doubling its footprint in the next five years. He believes there is space for 1,000 such stores in the country.

Shoprite has clearly identified the informal economy as central to its future growth. Recently, the retailer announced it had sold its furniture business to allocate more capital to the faster-growing parts of its business.

Old Mutual analyst Bianca Lakha explained that following a period of high capital expenditures, management is now focused on business optimization, market share gains, and balance sheet “right-sizing”.

The furniture segment was a relatively tiny part of Shoprite’s business, only contributing 3% of group sales and growing slowly at only 2.3%.

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.

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 led to significant returns for the company, Lakha said.

Source: Dailyinvestor