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AfkInsider Market Journal: Why I Invest In African Supermarkets

AfkInsider Market Journal: Why I Invest In African Supermarkets

Investors are waking up to the potential of putting money to work in African stock markets.

And with the continent’s consumer-facing industries expected to grow by $400 billion by 2020, it’s little wonder that retail stocks get lots of attention.

Grocery stocks are one of my favorite African investment plays. Why? Because everyone needs to eat. Food never goes out of style. And as the continent’s incomes and infrastructure improve, supermarkets will be where people come to get it.

But a less obvious reason I like these companies so much, is that African grocers are remarkably efficient at turning capital into cash flow. They do it so well that their American counterparts look sloppy in comparison.

Let’s take a closer look at how quickly five of Africa’s largest grocers turn chow into cha-ching.

We’ll do this by analyzing each company’s cash conversion cycle (CCC). This cycle measures the average number of days between the moment a retailer pays for a bottle of ketchup or box of cereal and the instant it receives payment from the customer who bought it. The shorter the cycle is, the more resources the company typically has available to grow its business or to reward shareholders.

Three elements comprise the cycle.

1. Days in inventory (DII)

First, is the average number of days that our bottle of ketchup sits in inventory (in a warehouse, on a truck, on a store shelf, etc.). We want this to be as short as possible. Lots of days on the shelf can indicate unpopular products, and in the grocery business, more chance of rotten fruit and vegetables or stale bread.


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We calculate days in inventory as follows:

DII = Average inventory / (cost of goods sold / 365 days)

Here’s how long it takes South Africa’s largest grocery chains to churn through their inventory.

  • Massmart Holdings (MSMJ.J): 57.3 days
  • Pick N Pay Stores (PIKJ.J): 27.4 days
  • Shoprite Holdings (SHPJ.J): 47.3 days
  • Spar Group (SPPJ.J): 12.4 days
  • Woolworths Holdings (WHLJ.J): 43.1 days

Keep in mind that this isn’t necessarily an apples-to-apples comparison. Some of the above companies (e.g. Massmart, Woolworths) sell a greater portion of housewares or clothing than others. Such items typically have a longer shelf-life. Even so, the shorter the duration the better.

2. Days in receivable (DIR)

Next, we figure the length of time it takes for the retailer to collect payment from customers. Most purchases at African supermarkets are still made with cash, but retailers have made increased use of credit in recent years, especially in South Africa and for big ticket items like furniture.

To determine how well a company gets its customers to pay promptly, we use the following formula.

DIR = Average receivables / (revenue / 365 days)

Here’s how the African grocers stack up:

  • Massmart Holdings (MSMJ.J): 17.5 days
  • Pick N Pay Stores (PIKJ.J): 13.7 days
  • Shoprite Holdings (SHPJ.J): 0.1 days
  • Spar Group (SPPJ.J): 42.5 days
  • Woolworths Holdings (WHLJ.J): 6.7 days

Note the outliers above. Shoprite’s receivables are very low because of its high proportion of cash sales. Spar’s is very high, possibly because it works on a franchise model, and needs to wait for cash to flow back from the franchisee.

3. Days in payables (DIP)

Finally, we measure how long a retailer can wait before it must pay its suppliers’ bills. Grocers typically pay for goods on credit. Larger retailers and those with shrewd management can often secure very favorable credit terms that allow them to delay months before settling accounts with their suppliers.

To measure this, we calculate days in payables (DIP). Unlike, DII and DIR, a higher DIP is better.

DIP = Average payables / (cost of goods sold / 365 days)

Here’s how long African grocers keep accounts payable.

  • Massmart Holdings (MSMJ.J): 87.1 days
  • Pick N Pay Stores (PIKJ.J): 51.9 days
  • Shoprite Holdings (SHPJ.J): 63.7 days
  • Spar Group (SPPJ.J): 54.1 days
  • Woolworths Holdings (WHLJ.J): 59.0 days

Check out Massmart’s 87 days. That’s a very long grace period. Might this stem from the hard-nosed negotiating tactics of the company’s largest shareholder, Walmart?

The Cash Conversion Cycle

Now let’s put all the elements together.

To calculate the cash conversion cycle we add the days in inventory to days in receivables and subtract days in payable.

CCC = DII + DIR – DIP

And here are our big five grocers.

  • Massmart Holdings (MSMJ.J): -12.3 days
  • Pick N Pay Stores (PIKJ.J): -10.8 days
  • Shoprite Holdings (SHPJ.J): -16.4 days
  • Spar Group (SPPJ.J): 0.8 days
  • Woolworths Holdings (WHLJ.J): -9.2 days

Strange. Almost all of them have negative cash conversion cycles. How on earth should we interpret that?

Quite simply. It means that these companies sell and get paid for bottles of ketchup before they even buy them.

Mind-blowing, right?

Consider Shoprite. It sells and is paid for its entire inventory every 47 days (DII + DIR). That’s almost eight times per year. But it only pays to entirely restock its inventory every 64 days – roughly six times per year. So, effectively, Shoprite’s not just getting paid by its customers, its getting paid by its suppliers, too.

How does this stack up to U.S. retailers? Very nicely. Walmart’s cash conversion cycle is 10 days. Whole Foods’ is 12 days. Even super-efficient Costco’s is three days.

So, a negative cash conversion cycle is a great thing to see if you’re a shareholder of one of these companies. It’s an especially good sign when it improves over time and is paired with healthy gross margins.

How to Invest

If you’d like to add one of these companies to your investment portfolio, you can purchase shares of Massmart (MMRTY), Shoprite (SRHGY), and Woolworths (WLWHY) over the counter through a U.S. stockbroker. For Pick N Pay and Spar, your best bet is to open a trading account with a South African broker.

Check back in a couple weeks for more ways to invest in the rise of the African consumer.

Ryan Hoover holds a beneficial interest in shares of Shoprite and Woolworths through his work with Africa Capital Group.