Opportunity beckons, but risks remain for Pick n Pay
In the same way that Tolstoy’s happy families are all the same but unhappy families are all unhappy in their own way, there is a straightforward and proven route to corporate success, but sadly many ways to get things wrong.
The story of the decline of Pick n Pay is a cautionary tale of the latter outcome. What has happened and how did it happen? The Pick n Pay share price is down 60% over the past 12 months, but if you go back further the picture is even worse.
When CEO Sean Summers first left the business in 2007, Pick n Pay and Shoprite had equivalent market capitalisations. A decade-and-a-half later and Shoprite is a mind-boggling 13 times the size of Pick n Pay.
The most recent Pick n Pay results showed a loss, and for good reason no dividend was paid. But in the early 2000s it had a sector-leading return on equity and paid healthy dividends. Focusing on short-term outcomes came at the expense of investing back into the business. A declining quality of the asset base resulted. Market share losses followed and now the trading density (sales per store per square metre) in Pick n Pay corporate stores is the lowest of its peer group.
While the situation is serious, it is important to appreciate that the problems are largely confined to the poor performance of the Pick n Pay corporate stores. The remaining assets (franchise, clothing and Boxer) are profitable and valuable. In fact, Boxer alone is probably worth R20bnR30bn, meaning that at the current market capitalisation of R12bn, the share price implies that the 300 SA corporate stores plus the 21 hypermarkets are valued at negative R8bn-R18bn.
Of course, the corporate stores are making significant ebit losses, estimated to be above R2bn in 2024. Ebit is earnings before interest and tax.
To fix Pick n Pay, Summers needs to leave Boxer and franchise alone and focus on returning the corporate stores and hypermarkets to profitability. Unprofitable stores need to be franchised, converted to Boxers or closed.
The hypermarkets are too big (they average 13,500m² versus Shoprite hypermarkets at about 9,000m²) and need to be shrunk. Sounds easy, but problems that were created over decades cannot be solved in months.
What are the challenges? They are cultural, financial, operational and strategic. Summers is an inspirational and authentic leader. Improving staff morale and therefore customer service should be an easy win for him.
Financially, the business is stretched, and the financial reporting function appears completely inadequate to provide the information required to make good decisions.
Bad capital allocation decisions have been made. Costly long-term store leases have been signed and it will require the co-operation of landlords to exit. Operationally, stores need to be refurbished and in-store execution improved.
Strategically, the business needs to be repositioned in a way that Pick n Pay stands for something again.
Right now, there is no unique selling proposition and it’s hard to know what the company stands for any more.
The situation is not too dissimilar to the previous turnaround Summers did when MD in 1996/97 after a debilitating strike at Pick n Pay.
Then the core business was struggling but a low-cost brand called Score bailed out the lack of corporate earnings. Now Pick n Pay again has an ailing core and Boxer is performing a similar role.
The main difference now is the store assets are poorer, the balance sheet is worse and the competitors are better. But despite a decade-and-a-half of mismanagement, the company still has annual sales of more than R100bn. It can be fixed.
But retail turnarounds are uncertain, especially if the balance sheet is strained.
In the 1980s OK Bazaars was the largest retailer in SA. By 1997 it was a shadow of its former glory, making huge losses. It was eventually bought by Shoprite for R1 (yes, one rand!).
EXTRAORDINARY
Clicks on the other hand languished for years and then was turned about in extraordinary fashion by David Kneale. Today Clicks is the most highly rated retailer on the JSE.
There has been a succession of poor management at Pick n Pay. But the one constant has been the control of the company by the Ackerman family.
Artificial high voting control structures like those in place at Pick n Pay are viewed poorly from a corporate governance perspective. But investors have tended to tolerate these structures when the businesses are performing well. This is clearly no longer the situation at Pick n Pay. It would serve all shareholders, including the Ackerman family, if this control structure were to be dismantled.
INDEPENDENT CHAIR
Furthermore, the appointment of an independent chair is an essential step to improve both governance and decision making at board level. Perhaps the Ackerman family is also fatigued by the burden of control. Everyone would be better served if it were relinquished.
Fortunately, the Ackerman family appears to realise that this is the “last chance saloon”. The store assets are in decay, the staff are demoralised and the balance sheet does not have the flexibility to make the investment needed.
A stronger balance sheet would allow more time to evaluate options and make changes incrementally. But the stores need refurbishment, and the balance sheet is weak. There is not the luxury of time. But at last, Pick n Pay has a leader who loves the company, its staff and its customers. Summers needs some luck and a free hand if he is to save this iconic SA retailer.
THE COMPANY STILL HAS ANNUAL SALES OF MORE THAN R100BN. IT CAN BE FIXED