Spar Group (code: SPP) is the latest in a long line of South African retailers that have burnt their fingers trying to go offshore with their businesses.
From Shoprite retreating from a range of African countries and Woolworths and Mr Price failing in Australia to Truworths’ continuing struggles with UK-based Office Retail Group, South African retailers have really sucked at global expansion.
Why?
Retail businesses are actually regional businesses, and this comes with some real-world facts that all the financial engineering and investment bankers cannot change. And, no matter how big the head office back in SA is, these facts don’t change.
I am going to use “Retailer ABC” as my theoretical starting point.
In the beginning, a young Retailer ABC has a single store, and its business is the following:
- Buy stuff from a range of suppliers as cheaply as possible (these get delivered to its single store),
- Sell that stuff at a market-up in your store, &
- Manage your staffing, overheads and pay your suppliers, bankers and taxes.
Retailer ABC does this well and makes a profit, but management soon realizes that they can make more money if they open a second store. And a third, fourth and so on…
Somewhere along the way, Retailer ABC is buying so many products and so much of these products that two major things happen:
- Retailer ABC can negotiate the price of the products its is buying lower and lower (or push creditor payment terms out, which is the same thing) due to bulk buying, &
- Retailer ABC builds a warehouse (called a “DC” for “Distribution Centre”) that all these products get delivered to before being broken down into smaller quantities and sent out to the individual stores (probably with Retailer ABC’s own trucks).
The combination of Retailer ABC’s rising buying-power and the efficient use of a DC (which allows for even more bulk buying and central inventory efficiencies) lead to dramatic rise in margins for Retailer ABC.
If Retailer ABC is smart, it passes some of these higher margins on to the customers at its store via lower prices. (Lower, say, than a single store retailer could compete with…)
These lower price points drive more consumers to shop at Retailer ABC’s stores, which means more volumes, higher buying-power, more margins. And, more appetite to roll out more stores, which also means more volumes, higher buying-power, and more margins.
And so, the virtuous cycle of a growing retail business goes, which makes this business model all about momentum building scale, and scale building momentum. (Emphasis in this paragraph on growing; ask Pick n Pay how hard this is when you are not growing…)
Inside of this simple, compounding business model is the answer for why so many of our retailers’ offshore expansions have failed: there was a lack of scale and momentum, and, thus, the local, regionally-scaled competition eats them alive.
Our large, listed retailers prefer buying businesses rather than building them, as building them can take decades. Impatient public markets don’t like waiting decades and the Board’s careers cannot wait that long. The bankers that are selling the retailers the acquisitions and deal-funding also particularly like acquisitions.
Hence, all the acquisitions.
Yet, many of the acquisitions are sub-par in their home markets: when a SA-corporate acquires a foreign business, they are probably a buyer of last resort because all the well-connected, smart investors in the local market have declined to buy the lemon.
And, if retail is a scale-sensitive, momentum-needing business model, then having a small scale with (probably) negative momentum is going to mean that you are competing against the other retailers in this foreign market at a large disadvantage and, as we have seen, are likely to fail.
Just ask Woolies in Australia shutting down stores, Spar in Poland trying to get dwindling franchisees to buy from them or Truworths in the UK trying to get people to buy their clothing.
For these reasons, if we look at the current major success story on the JSE—Shoprite Holdings—what we see is the evolution of their strategy over the last decade:
- From selling (only) groceries throughout (the whole of) Africa…
- To selling everything within (mostly) just South Africa.
Shoprite is regionally using scale to build momentum, and momentum to build scale.
In broadline, corporate-run retail, there really isn’t much else.