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Local Sourcing Lowers Shoprite Costs in Africa

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Local Sourcing Lowers Shoprite Costs in Africa

Local Sourcing Lowers Shoprite Costs in Africa

Managing significant risk in African markets has been the key to Shoprite’s success on the continent.

With stores under way in the Democratic Republic of Congo, big ambitions in Nigeria and rising incomes in Angola boosting a growing number of stores there, the company has shown up the fence-sitters who are still wondering if African markets are a good investment option.

Given the company’s appetite for risk, there has been some surprise that it is not a bigger player in Zimbabwe, where it was recently pursuing an acquisition to broaden its presence.

The risk faced in African markets north of the Limpopo tackled by Shoprite has mostly been of the high-risk, high-reward variety, relying on rising disposable incomes, low  and mostly informal  levels of competition and improving political situations. Being first to market has also been a key strategy.

Zimbabwe bucked the trend. For the past decade it has been a rapidly shrinking market and, importantly, one in which significant local competition exists.

The company’s entry strategy into African markets has typically been green fields, often on a lease basis with local property developers and in some cases, it has built its own stores because of the difficulty of finding appropriate sites.

Shoprite has just one store in Zimbabwe, an outlet in Bulawayo. The timing of the Zimbabwe entry could not have been worse.

The store, intended to be one of several, was opened in 2000 when the economy, already in difficulty, started a rapid downward spiral as a result of the state’s systematic destruction of commercial agriculture.

A broader Zimbabwe profile was always on the cards and an acquisition was a sensible entry strategy in a highly traded, and still recovering, market.

The recent acquisition target was OK Bazaars, which is a well-established player. However, on Monday, 12 October 2009, Shoprite announced it was no longer keen on investing in Zimbabwe for the time being due to uncertainty about the country’s political and economic climate.

Local competition is not an issue in most of Shoprite’s markets north of the border. Even in countries where it competes with Massmart, it is the biggest retailer.

However, Kenyan retailers Nakumatt and Uchumi are both expanding rapidly in east African countries and are competing with Shoprite in Uganda and Tanzania, for example.

Shoprite has its work cut out in managing logistics and costs.

Years of experience have fine-tuned the supply chain and the company is rapidly increasing local sourcing of goods, which keeps costs down.

The import bill remains high for manufactured goods as few of these are produced in markets outside SA and high costs of production in other African markets means it can still be cheaper to import many goods from the home base.

But it has steadily increased local production of fresh goods and is now self-sufficient in vegetables. Through its subsidiary Freshmark, Shoprite has several hundred African farmers in about nine countries on its books to produce for its supermarkets.

Local sourcing extends to sugar, flour, cooking oil, pasta, fruit juices, coffee, tea and bottled water.

Source: Business Day

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