Pick n Pay boss tests investor faith

Pick n Pay is in a pickle. It announced a R4bn equity fund raising and a plan to spin off and separately list its discount chain, Boxer. The move is meant to fix its lopsided capital structure and appease lenders after flagging an annual loss and breached debt covenants. But it also tests investor faith in its new boss, Sean Summers.

Summers, who is in his 70s and returned to the group late in 2023 after a decade-long absence, has been unwinding a growth blueprint drawn up by his predecessor, Pieter Boone, who had made Boxer the cornerstone of his turnaround plan.

Summers has yet to unveil his revival plan. Yet he is asking investors to trust him with more money into a smaller business without showing them how he will fix Pick n Pay’s long-standing problems. In fairness, he said he would do so in May after consulting with shareholders and conducting a review of the business.

The rights issue and the Boxer listing are risky bets on his ability to revive Pick n Pay’s fortunes. The rights issue will dilute existing shareholders, unless they cough up more cash to maintain their stake. In addition, the Boxer listing will deprive the group of a portion of its fastest-growing business, which has put up a fight against Shoprite Pick n Pay’s crosstown rival that has largely cornered the expanding low-income segment of the market. The grocery market is expected to top R850bn in 2026 with 60% of that money coming from low-income earners and welfare recipients, according to Pick n Pay’s own estimates.

Pick n Pay said it would use the money to pay down debt, which stood at nearly R7.2bn, and to invest in its core supermarket business, which has been losing customers and margins to competitors. The company said it would retain a majority stake in Boxer and benefit from its growth potential and cash generation.

From where we stand, these are not convincing enough for shareholders to part ways with R4bn. Pick n Pay’s debt problem is not so much a function of its borrowing levels but of its poor profitability. The retailer has the thinnest profit margins in the industry. It barely makes 2% after paying for its costs, less than half what Shoprite grinds out every year, leaving little room to compete in a market in which debt-laden, cash-strapped consumers are hunting for bargains.

The rights issue will not solve these underlying issues, unless it is accompanied by a sweeping overhaul of the Pick n Pay business model, which has been plagued by high costs, low productivity, weak pricing power and outdated store formats. It would be a sad sight, but Pick n Pay must deploy defensive capital allocation strategies such as job cuts and improving supply chains to regain its competitive edge.

Aside from exposing Boxer to the scrutiny and pressure of stock exchange market players, the listing of the business will make Pick n Pay smaller and expose Boxer to other players in the sector, who may see it as opportunity to buy it and erode Pick n Pay’s majority stake.

Even before outlining his turnaround plan, Summers is challenging investor confidence in him. He is asking for more money to be pumped into a smaller business but does not reveal how he would solve Pick n Pay’s problems. That will be a tough sell.