South African Retail

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CEEMEA | South Africa
Retailing - Specialty (Citi)
Equities
17 May 2012 │ 92 pages
South African Retail
 Industry Overview
Africanisation of SA Retailers: A Game Changer for Some
 Africa Retail Trip — Post our African Retail Trip to Nigeria, Zambia and Kenya in March 2012, we have compiled this report to provide a thorough insight into the African retail landscape, and discuss opportunities and risks for SA retailers in Africa. We also make a number of changes to our ratings and target prices (see page 2 for summary).  West Africa: the Opportunity, East Africa: the Challenge — SA retailers have already built out a strong presence in South and Central Africa. West Africa is the area where most are now targeting given 1) minimal retail penetration and 2) sizeable and growing populations. East Africa is where SA retailers lack scale due to strong local retailers. Acquisition looks to be the easiest route to build scale in this region. Zaheer Joosub

+27-11-944-0032
zaheer.joosub@citi.com
K P Pareekshith
kp.pareekshith@citi.com
 Largely Serving the “Cream” – Will Take Time to Reach the “Gold” — A key takeaway from our trip was that most SA retailers are largely serving the middle to upper income consumers in Africa (especially in West and Central Africa). This is due to most stores being located in malls which are serviced by these segments. As store growth continues to build in Africa, the ability to serve lower incomes will become possible and this should be particularly rewarding for Food and Value retailers from SA.  Informal Markets – Structural Hoarding of Retail Consumer Spend in Africa — The formalisation of retail outside SA (60%) is very low, with the next highest country being Kenya at 30%. Nigeria has formal retail penetration of 5%. While the opportunity to lure consumers from these markets is clearly an attraction for SA retailers, we would caution that these markets are more likely to remain a structural issue. This is due to the important retail function they have played for decades in these countries.  Margins Are Better, Quite a Lot Better — On average, we found GP margins to be around 20% higher in African stores, with Operating margins being 30%-40% higher. In Nigeria, some SA retailers are seeing GP margins that are 50% higher than SA and operating margins that are 300% - 400% higher (due to much higher trading densities).  A Game Changer for Some, Not All — We see Shoprite, Pick n Pay and Massmart having material growth in their Non-SA sales over the next 5 years. The only other retailer that we believe could see material benefit from African growth in the medium term is Mr Price, due to its differentiated value offering (but need to buy back franchisees/convert to JV’s, same for Woolworths). The other retailers are unlikely to see Non-SA sales being more than 5% in the medium term.

 Pecking Order — We maintain our existing pecking order per sector for SA retail, although stocks in each have moved around: 1) Food/Drug Retail (Shoprite > Pick’ n Pay > Spar > Clicks), 2) Clothing (Mr Price > Foschini > Truworths), 3) Furniture/Other (JD Group > Lewis> Massmart > Woolworths). Pick n Pay and Shoprite are our only Buys, Woolworths is our only Sell. The rest of our SA retail coverage is rated Neutral. See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures. Citi Investment Research & Analysis is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Citigroup Global Markets

South African Retail
17 May 2012
Contents
Summary – A Game Changer for Some
African Retail: Swings and Roundabouts
Central/South in Play, East/West...
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