Cashbuild offers value

Cashbuild offers value

Meyrick Barker


Investment Analyst

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The building material retailers were one of the few beneficiaries of the COVID pandemic as people spent disproportionally on renovating their homes during the lockdown period and while working from home. This bumper period is over and consumers’ home improvement spend has retracted.

We delve into one of South Africa’s largest retailers in this sector, Cashbuild, discussing the challenges of operating in this segment of the retail industry and why we believe the business makes for a sound investment.

Brick by brick
Cashbuild was originally founded in a small Eastern Cape town in the late 1970s, as a subsidiary of Metro Cash & Carry – part of Natie Kirsh’s retail empire. At the time, lower income communities in rural areas and townships were largely unserved by the established building material retailers who viewed the limited individual buying power of the communities as too fragmented and high risk. Albert Koopman, Cashbuild’s founder, felt differently. He believed that a retailer offering a better proposition could gain market share from the smaller regional firms and independents servicing the market. He subsequently founded a cash wholesaling business catering specifically to the smaller building contractors and traders, selling basic building products at the lowest prices.

Sanlam assumed ownership of Cashbuild in the 1980s (via Tradegro) prior to it being listed on the JSE Securities Exchange in 1986. Pepkor then took a material stake in the business during the 1990s before fully divesting in 2000, but not before shifting Cashbuild from its wholesale focus to the retail business that it is today. The business has been publicly owned since then and has maintained a particularly strong presence in township and peri-urban areas.

Considering multiple stakeholders before it became fashionable
Around its fifth year of trading, Cashbuild ran into difficulties. Self-introspection led to a significant change in management style, pivoting from what was an autocratic environment to one that empowered its workforce. During the apartheid years in South Africa, Cashbuild was viewed as a politically radical private company when, as part of the changes implemented, it appointed black individuals to branch management positions and granted stock options to black employees.

The ethos of good corporate citizenship and caring for multiple stakeholders endures to the present. Cashbuild’s corporate social investment spend of R180 million per annum is significant in the context of annual group earnings of approximately R440 million.

A quality retailer you can trust
Stock availability, low prices and excellent customer service are common goals for retail enterprises. During tough economic times for consumers, the demand for cheaper products is naturally higher. However, for building material retailers, product integrity may be compromised when price is the primary consideration. For example, this is evident in the notable decrease in the thickness and commensurate reduction in product lifespan of steel roof sheeting that is widely used in low-cost housing. Cashbuild seeks to strike a balance between sourcing cheaper products and adhering to building regulations and SABS standards, where applicable. Upholding their long-term reputation as a quality product retailer can, in a tough economic environment, come at the short-term cost of lost sales to retailers that do not maintain the same standards.

Cashbuild makes a concerted effort to educate customers on the merits of different products. This is achieved through training staff to explain optimal solutions and the establishment of social media campaigns and a DIY YouTube channel to help customers make wiser choices.

Key product pricing considerations
While retailer brand awareness and established customer relationships are important, it is common practice for building contractors to source quotes from various building material retailers before negotiating a discount with their preferred store. In particular, cement pricing is a key determinant of where a customer will buy the rest of their basket. Cement is a product that generates very low margins unless volume rebates are met. The ancillary sales generate far higher margins for the retailer. In this competitive environment, the ability to optimally source stock at the best price provides an advantage.

Cashbuild’s national footprint
Cashbuild is currently a chain of 317 corporate-owned stores that trades under two brands: Cashbuild (264 stores) and P&L Hardware (53 stores). Stores are predominantly located in South Africa although approximately 10% of sales occur across Namibia, Botswana, Lesotho, eSwatini and Malawi. The chart below demonstrates store layout by country and consumer segment serviced. Cashbuild uses their national bulk to procure volume rebates from suppliers who deliver directly to stores.

The competition
Large, listed competitors include Spar’s Build It, Massmart’s Builders Warehouse and Pick n Pay’s Boxer Build. Although targeting slightly different end consumers (eg Builders Warehouse typically targets a more affluent consumer), the large corporate players collectively comprise around R50 billion in annual sales, or 60% of the total building retail market. For context, the South African grocery market’s annual sales is estimated at about R1 trillion.

The tenacity of owner-managed franchises cannot be underappreciated and there are several formidable independent competitors such as Mica, Power Build and Essential Hardware. Importantly, many independent operators have aggregated within buying groups such as Elite Star Trading, allowing the entrepreneurial operator to retain their independence but benefit from centralised, large-volume procurement, therefore remaining competitive with the large corporate chains.

As there are few impediments to opening a building retail store, store openings tend to be cyclical. During upswings in building activity (as recently experienced), many entrepreneurs open building material stores. Although their stock holdings are often limited and prone to fail as cycles turn, they are quite disruptive over the short term from a pricing perspective, particularly when they don’t comply with the same regulations as larger listed players.

Delivering what the customer wants, where they want it
Although less evident in a distressed environment, customers tend to stick to a brand they know and trust. These brand preferences differ across regions and having the right store manager that is empowered, supported and acutely aware of local dynamics is vital to the success of such a business. Promoting localised talent from within is a key focus for Cashbuild as this typically translates into stronger community support and buy-in from the catchment area. Cashbuild’s ability to understand their customer base ensures they provide a focused range of products (primary sales mix charted below) and services suited to the needs of each market. The business model is one of retailing high volumes of building materials at discount prices through large-format stores, ensuring that stores can be a one-stop-shop for the client base. The ability to procure a full basket is important for the portion of the customer base who cannot afford to waste money on the transport costs of visiting multiple stores. Cashbuild’s free local customer delivery service also serves as a positive differentiator as they get the product promptly to where it’s needed.

Although Cashbuild offers online sales, they remain negligible. Having struggled to implement a credit offering to customers in the 1990s, Cashbuild solely operates on a cash basis today. They do, however, partner with external credit providers who offer in-store credit.

Resilient foundations with scope for growth
Cashbuild has been a consistent operator through many cycles delivering good economic returns. It is a conservatively managed business that ekes out incremental gains in a competitive market. Most Cashbuild store layouts are very standardised – a roughly 1 200 square metre large box format often located at or near a mall. There are essentially two layouts to meet the local needs. This rigid operating model has served them well to date but makes it relatively costly to open a new store.

Cashbuild can respond to the competitor disruption now evident in the market and use their experience, spanning more than five decades, to evolve their retail offering. This can take several forms, whether it be smaller store formats to viably serve a broader section of the market or deploying the strength of the Cashbuild brand into a franchise model. This captures the entrepreneurial spirit of operators and empowers them to offer a more personalised offering to their respective communities.

Although the lower income consumer is currently in a weak position, as is reflected in recent contracting sales volumes, there is a degree of resilience within the cash flows that underpin store spend within this industry. People remain aspirational in wanting to create a home, formalise existing structures or improve on what they have. Furthermore, lower end consumption spend is reasonably resilient in South Africa. Social welfare payments are generally economically insensitive and increase with inflation, and public servants typically have very secure jobs that deliver real wage growth.

While Cashbuild is unlikely to see the recent boom in building retail spend manifest again in the near term, we believe its very weak current share price underestimates the positive longer-term prospects of the business.

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