04 APRIL 2009
The secret of Whitey Basson's success
by Sasha Planting
Love him or hate him, Whitey Basson has turned Shoprite into the darling of retail. Sasha Planting spoke to the man who runs Shoprite with an iron fist, and delves into his business philosophy and the secrets of his success.
In public, Shoprite CEO Whitey Basson loves to play the joker, poking fun at himself, his chairman and rivals. But these days few are fooled by the act. Behind the humour lies a razor-sharp mind that interrogates every detail, every opportunity, every nuance in a market. Basson leaves nothing to chance.
Thirty years ago clothing retailer Pepkor acquired Shoprite, a chain of eight Western Cape supermarkets, for R1m. Today the Shoprite group is worth almost R30bn, and it is still growing as Africa's dominant retailer. In the past six years the group grew its market cap tenfold, dwarfing other listed retailers.
If Basson and chairman Christo Wiese had their way, much more of this value would be in their own hands. The two supported Brait Private Equity's attempt to buy out the business two years ago but the deal fell through.
While Basson is seen as having an iron fist, Wiese is no less concerned with control of Shoprite. At last count, Wiese held 15% of Shoprite's (82,3m) ordinary shares in the company, worth a staggering R4,1bn. By comparison, Basson's investment in Shoprite is tiny. He holds "only" 4,9m shares, worth R248,7m at today's price.
But, thanks to an outdated control mechanism, Wiese also holds 277m "deferred" shares in the company, which don't have any value, but which give him extra votes. Effectively, this gives Wiese 44% of the votes at Shoprite - a strong position allowing him to block anything he doesn't like, such as a takeover.
It is these deferred shares that give Wiese such a powerful negotiating hand, and partly why Coronation and Allan Gray railed at the Brait takeover offer, which Wiese underwrote.
But Shoprite's success is not just about market timing and its sustained investment in infrastructure over the past decade. It has plenty to do with Basson, a no-nonsense, hard-nosed Afrikaner from Stellenbosch with a penchant for deep-sea fishing, a talent for numbers (he's a CA), a clear vision, and eyes in the back of his head.
About seven months ago, Basson was on a fishing trip, reflecting on the high fuel price. He phoned his office from the boat, suggesting an advert to the effect that Shoprite's own trucking fleet would ensure its prices would be less affected. The advert resulted in an immediate upward move in sales.
Basson doesn't like small talk or corporate politics - and he doesn't like to follow the herd. If he did, he wouldn't have acquired a company (OK Bazaars for R1) that was losing R1m a day and whose accumulated debt was more than Shoprite's annual profits. He wouldn't allocate a percentage of annual profits to high-risk projects: "If we can't expose ourselves to risk, we shouldn't be in business," he says.
And he wouldn't spend a portion of his weekend sourcing, of all things, sausage casings. "For fun I stick my neck into every area of the business, just to keep the pace of the business up. I manage by embarrassment," he quips.
Shareholders, though, are happy to dish out the same treatment. Basson has had to put up with complaints about the slice he was allocated of the substantial value he has created for the retailer. Most vociferous was Brian Molefe of the Public Investment Corp (PIC) - a 13,4% shareholder - three years ago when Basson took home an enormous pay package of R59m. But Wiese feels he deserved that. "Why would I pay more for someone than I needed to? I have a reputation for not overpaying. What do you pay someone who has grown a R1m investment into a R30bn business?"
Basson and Wiese's friendship developed in Upington in 1965. Wiese was second-in-charge at Pep and Basson became operations director. When Pep launched its foray into food and groceries with the Shoprite acquisition in 1979, Basson was made MD by the then Pep chairman and founder, Renier van Rooyen.
Wiese, who rejoined Pep Stores as its chairman in 1981, is an ideal foil for Basson. "I am a financier, not an operator," he says. "My job is to create the corporate space for people like Whitey to do their job. He knows I will cover his back, and I know, as the controlling shareholder, that he will look after shareholder interests." Of the similarities shared by the pair, one stands out: "We are strong Afro-optimists. We are real boere in that sense."
Basson's exposure to Pep's retail model - which aimed to provide quality, durable clothing at deeply discounted prices - influenced his long-term vision for Shoprite. "We wanted to provide millions of customers with everyday low prices on everyday goods. On basic foods, our prices would be the lowest," he says.
The acquisition trail began in earnest when Shoprite bought Grand Bazaars for R43,3m in 1990. The next year the pace quickened when Basson acquired the Checkers group (including Stuttafords/Greatermans) for R55m. Overnight Shoprite trebled in size to 241 outlets with a staff of 22 600.
Then in 1997, in one bite, Shoprite acquired 139 OK stores, 18 Hyperamas and 21 House & Homes. How did Basson digest this acquisition, particularly as OK was bigger than Shoprite? "Quickly," he smiles. "It was in really bad shape."
It was said that within a week of acquiring OK for R1, Basson made more changes to the company than the previous owner SAB had done in a decade.
By 2000 the company slowed its acquisition spree. "We became cautious about expanding," says Basson. "We wouldn't buy market share at the cost of earnings."
Growth lay in adapting the model to changing consumer preferences. Shoprite became more aggressive in its repositioning of Checkers as a destination for upper-income shoppers. "This was always the plan, but at the time Shoprite was too small to swallow Checkers. It was only when I bought OK that I had space to separate the chains again."
In 2003 Shoprite took control of its supply chain by establishing central distribution centres across the country. "Stock-turn [the number of times an inventory is sold during the year] at these centres exceeded that achieved by our retail outlets by more than 50%," says Basson. "Poor stock-turns reveal bad planning, which results in overbuying, big markdowns and lower margins."
Last year the company sacrificed gross margin for turnover growth. It ran a similar "subsidised prices" campaign in 2002 when food prices spiralled. "We are prepared to sacrifice profits to remain the cheapest food retailer in SA. We can't afford to let that area of our branding slip," Basson said last month.
While Basson was turning the ailing Checkers around, he was also planning to expand into the rest of the continent. Initially these ideas were scorned. "The board thought it would be a wild gamble," says Wiese. But Basson has been proven right. The African operations grew sales by 54% and contributed 14% to supermarket revenue in the six months to December.
Institutional investor Allan Gray bought into the Shoprite vision long before the company became trendy. "For five years Shoprite was underestimated," says director Delphine Govender.
"People thought it was an old-style SA retailer with strange control structures." What Allan Gray saw was a management team investing huge energy and resources into a number of initiatives simultaneously: centralised distribution; an amazing IT infrastructure; the repositioning of Checkers; and investment in Africa. "I'm not surprised this was a top performing share last year," says Govender.
Not every foray into developing markets has been a success though. In India, retailers and government have fought hard to keep global groups out. In Egypt, Shoprite pulled the plug because of legislation and customs duties, incurring a R91m loss.
Basson has a reputation as a taskmaster, but no-one can single-handedly run a business of this magnitude - 1 000 stores in 17 countries and 80 000 employees. "I don't pace myself, the business paces me. I'm available for 24 hours a day. I surround myself with good people, people who can take decisions quickly, not slowly. Most of my guys have worked with me for 10, 15, 20 years," he says.
Wiese adds: "You can't run a business like this without loyalty. Whitey may be outspoken to the point of being abrasive. Yet he seldom loses a senior person."
Basson doesn't always get things right. Stock shrinkage was a favourite concern of financial analysts a few years ago. He scoffs at this: "So we had stock losses. Big deal. At the time I didn't even know where the stock was. When you are losing R1m a day, you have to prioritise decision-making."
Shoprite has also had its fair share of controversy. Apart from Basson's pay package saga, Wiese is quick to defend the 2007 takeover bid. "You say I was trying to steal the company - yet every shareholder had the right to come in with me on the same terms."
Wiese adds: "People underestimate the risks we were taking. We'd have had to gear the balance sheet and I would be sitting with a company with R10bn or R11bn worth of debt on the balance sheet. Imagine that in this credit crunch."
He wouldn't attempt a similar deal again, says Wiese. "I need my management team focused on the operational aspects. I've been listed, and I've been unlisted. Believe me, unlisted is better. You don't have people who have never fought their way out of a paper bag telling you what to do."
The deal seemed attractive at the time, though. For one thing it would have created a perfect opportunity for a BEE transaction. And BEE - or rather the lack of it - is glaringly apparent at Shoprite. Says Wiese: "We will not do a BEE deal because we have to do one. We will do it because we think it's the right thing to do, and we will do it our way. We want it to be broad-based and we want the correct people to benefit."
Shoprite's relationship with its union has been rocky. Says Saccawu national negotiations co-ordinator Thoko Mchunu: "I can't say the relationship has been healthy. The management style is of old conservatives. They are dictatorial, don't seek joint solutions and they've not created a climate where workers are heard."
In 2006, union members went on a costly strike for 12 weeks. Mchunu concedes that since 2006 the union has noted "a little more flexibility and a softening. Things are heading in the right direction."
Suppliers have also felt the tough edge of Shoprite. "They are not the easiest people to deal with," says Stephan le Roux of property management company Growthpoint. "They are hard negotiators." But he adds: "I like working with this client. There are arguments along the way, but they play open cards."
Basson's strongest point, says Gryphon Asset Management analyst Abri du Plessis, "is that he knows his customer, he knows which market segment to target, and he doesn't chop and change as the economic cycle progresses".
Basson's rough-and-ready style belies a thoughtful approach to investment for the long term. "We hire more graduates than most retailers locally and internationally," says Basson. And Shoprite invested "billions of rand" to create a centralised IT network that enables rapid decision-making. "I can tell you what we sold in Nigeria at 8 am today."
That just about sums up Basson's approach to management, yet he retains an acute sense of the big picture. Consumers and investors are most grateful - while his competitors are trying to work out how to replicate the magic ingredients.
Source: The Financial Mail is South Africa's leading publication in its field. It provides the most comprehensive coverage of investment, business, financial, political and social trend. Visit our web-site at: http://www.fm.co.za.