The Place Where Supermarkets Make 12%+ Revenue Growth: Africa

Feb.26.13 | About: Shoprite Holdings (SRHGY)

While much of Europe and the U.S. stagnate there is one continent undergoing a massive consumer revolution. Africa has emerged in the past 10 years into a growing consumer powerhouse. Companies are beginning to recognize this and those that do, are experiencing incredible growth in these markets.

Supermarkets with Super Growth

While a super market chain in the U.S. like Safeway (NYSE:SWY) or SuperValu (NYSE:SVU) struggles just to grow, Shoprite (OTCPK:SRHGY) in Africa (not to be confused with Shoprite in the U.S.) has consistently generated double-digit revenue and profit growth. Shoprite created revenue growth between 7% and 24% over the past five years (with 7% being the "bad" year). The last half of 2012 saw revenue growth of 14% and net income growth of 16%.

The real magic of a company like Shoprite is that it is focused on the African continent where an emergence of new consumers is driving overall spending combined with a strategy designed to best capture this new value creation. Shoprite implemented a strongly targeted strategy where it offers three core brands that allow it to capture segments from the very poor to the middle and upper income brackets.

Shoprite's core brand is, not surprisingly, Shoprite. This brand is designed for the mass market, centered around low-priced value and the marketing and positioning is very similar to Wal-Mart (NYSE:WMT) in the U.S. The key is that both the price points and the brand positioning fit perfectly with the largest segment of the market. The "Checkers" brand is positioned to be upscale. Though not necessarily a "Whole Foods," as that is taken by another competitor called Woolworths, Checkers is essentially a higher-end but not premium supermarket that is only found and positioned for relatively high-income areas. Shoprite's third key brand is Shoprite U-Save, which is a smaller lower-cost version of Shoprite only found in low-income areas. Shoprite U-Save essentially provides an option for those with relatively little money to get access to standard groceries at decent prices.

Dominating South Africa

Shoprite has utilized this model to dominate the South African market. Previously, its major competitor - Pick n Pay (OTCPK:PKPYY) - dominated the South African market, yet over the past 10 years its market position has reversed. Pick n Pay has not been able to generate the same levels of growth as Shoprite has, though revenue still grew almost 7% last year.

Shoprite has been much more successful at using its business model to become the market leader. Pick n Pay, in contrast to Shoprite, uses just its Pick n Pay brand to try to market to the value segment and higher-end segments (in effect trying to use Pick n Pay to appeal to both the Shoprite and the Checkers segments).

Pick n Pay's strategy has over the past five to 10 years proven to be relatively ineffective in this new climate and Pick n Pay has had to undergo a restructuring.

The Real Growth

Shoprite solidly dominates its home market in South Africa, however, its real and massive growth is coming from the rest of Africa. The last half of 2012 saw revenue outside South Africa grow 28.2%. It has been expanding aggressively into the continent with 131 non-South African stores in 16 countries. The management team has done a phenomenal job identifying growth areas and pushing in with its strong capital base and expertise in running this kind of business. Where it goes, it has been very successful in taking over a large market share and is challenging its less experienced local rivals at every turn.

Even while it continues to expand, generating massive returns for its investors, the other opportunities are unparalleled. So much of the continent is yet to see Shoprite or other major brands and the potential for further expansion is incredible. The potential in Africa is not in the flashy, and "exciting" new industries but is in fact in providing basic services like supermarkets. Those services are only now becoming fully developed and provide major opportunities for growth for industries that can only maintain conservative growth levels elsewhere.

U.S. Companies in Africa

While there are a number of U.S.-based companies focused on the African market, the number is still relatively small compared with the opportunities.

In the consumer space, U.S. companies such as Coca-Cola (NYSE:KO) and Proctor & Gamble (NYSE:PG) have been driving major growth on the continent for decades. Coca-Cola innovated a new distribution model that is allowing it to reach African consumers in even the remotest village. P&G innovated new products that specifically fit African price points and unique needs and as a result, has seen some of its brands take off.

Wal-Mart also has begun looking at the continent, buying a majority stake in South African wholesaler and retailer Massmart. With Wal-Mart's scale, we may see Massmart emerge into an even stronger player it the market. It is important to note that while Massmart and Shoprite are competing retailers, their store and product mix are different enough that the Massmart/Wal-Mart combination does not actually provide a great threat to either of their core businesses.

The Final Word

Overall, the opportunities and potential are tremendous and slowly American companies are waking up and looking to the continent as the last frontier for driving outsized growth. The companies that come to Africa will most likely enjoy major growth. However more international companies need to learn to understand unique African needs and how to do business, like Coke and P&G do.

Until that point, much of the growth on the continent will likely come from local African companies that more completely understand the needs and the market in Africa-like Shoprite. Lastly, many of the larger South African companies can be purchased as pink sheet companies (their primary listings are usually in Johannesburg, South Africa) in the U.S., such as Shoprite, which trades under the ticker SRHGY.

Disclosure: I am long KO, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.