How we analyse a stock - part 2

How we analyse a stock step 1/3 continued

Please note that this is not financial advice. 

This is just a brief description of how we analyse stocks and it should be said that investors can dig a lot deeper than this.

To make this easier, we will break it down into 3 simple steps:

1. Understanding the business 
2. Financials 
3. Researching leadership and management

In part 1, we started with step 1, in this article we will continue where we left off.

Understanding the business (continued)

Innovation

Shoprite is positioned as a leader in the industry and on the African continent. This is evident in infrastructure, systems, and intellectual property and is reflected in the way customers respond to offerings.

Increased competition provides more product and shopping options to customers. This drives innovation in systems and support functions to deliver on high customer expectations. Let's look at how Shoprite responded.

Shoprite responded by:
Expanding the scope of their customer offerings to include more digital solutions.
Leveraged Checkers sixty60 further and continued to diversify revenue streams.
Extended digital ecosystems by improving virtual vouchers and coupons.
They are way ahead.

What is Shoprites goal?

Simply put, Shoprite is in the business of sustaining lives through the products they sell. Their objective is simple and clear. They want South Africans to live better lives because of being Shoprite customers.

Economic engine

If we assume that Shoprite works on a profit per store basis, we can do the math. (As of 2021)

Profit for the year= R4 859 000 000
Total Stores= 2400
Profit per store= R2 024 583

The more stores, the more profit.

Understanding the economic moat

We will look at the following moats:
Size
Economies of Scale advantage
First Mover advantage

Size

Shoprite's market cap is considerably higher than other competitors.
Shoprite- R135.23 billion
Clicks- R72.3 billion
Spar- R31 billion
Pick n pay- R22.92 billion

Size can most definitely be a moat.

Economies of Scale Advantage

Shoprite's extensive footprint and the large volume of goods moving through their stores allow them to source goods cheaper than their competition.

First Mover Advantage

Shoprite has been expanding in Africa for ~20 years. It has not always been easy for them. They have dealt with poor infrastructure, and regulatory requirements and sometimes even had to build malls and shops for their stores. This creates a barrier to entry.
Checkers sixty60 is also an example. It was the first of its kind in SA and came at the best time. Checkers sixty60 flourished and took off during mandatory lockdown.