Mar­gin of er­ror

CEO’S pre­dicted 5% in doubt as an­a­lyst claims fran­chisees hin­der growth

Finweek English Edition - - COMPANIES & MARKETS -

NICK BAD­MINTON, CEO of em­bat­tled re­tailer Pick n Pay – which last week said it’s plan­ning to re­trench 3 137 of its 49 200 strong work­force in a bid to re­duce op­er­at­ing costs – says the group can achieve a 5% trad­ing mar­gin with fur­ther cost-cut­tings and im­proved buy­ing. A 5% trad­ing mar­gin would put it on an equal foot­ing with archri­val Shoprite.

How­ever, some an­a­lysts aren’t con­vinced Pick n Pay could achieve that while it still has a sig­nif­i­cant num­ber of its stores op­er­ated by fran­chisees. “I don’t be­lieve that’s achiev­able with its cur­rent busi­ness model,” says Ned­bank Cap­i­tal an­a­lyst Syd Vianello. Of Pick n Pay’s 869 out­lets (ex­clud­ing in-store phar­ma­cies and its 25% in­ter­est in Zim­babwe’s TM Su­per­mar­ket), 379 are op­er­ated by fran­chisees.

The group sig­nif­i­cantly in­creased its fran­chised port­fo­lio when it con­verted its Score chain – mainly based in SA’s town­ships – into Pick n Pay out­lets a few years back, invit­ing black fam­i­lies to take own­er­ship of the stores.

Vianello says at­tain­ing a 5% mar­gin would re­quire ex­tra­or­di­nary per­for­mance by cor­po­rate stores, which he doesn’t be­lieve would hap­pen.

Bad­minton’s de­sire for a high mar­gin is a de­par­ture from a po­si­tion adopted by founder Ray­mond Ack­er­man, un­der whose lead­er­ship Pick n Pay’s trad­ing mar­gin ranged be­tween 3% and 3,5%, as he be­lieved in strik­ing a bal­ance be­tween mak­ing a profit and meet­ing con­sumers’ needs and al­lowed staff costs to soar. The group’s cur­rent trad­ing mar­gin is a neg­li­gi­ble 2,7% – way lower than its com­peti­tors’.

Pick n Pay has been on the cost con­trol trail for the past cou­ple of years while si­mul­ta­ne­ously try­ing to im­prove its dis­tri­bu­tion ef­fi­cien­cies and op­ti­mis­ing SAP. “We think 5% is achiev­able but wouldn’t like to be held to a tar­get date,” says Bad­minton. “We’ve fo­cused very closely on cost re­duc­tion over the past year, par­tic­u­larly on GNFR (goods not for re­sale), and have achieved much – with much yet to achieve.”

Mean­while, the ru­mour that Pick n Pay is a tar­get sighted by Bri­tish su­per­mar­ket gi­ant Tesco doesn’t want to go away, de­spite the South African fam­ily-con­trolled re­tailer rub­bish­ing sug­ges­tions it’s in talks about a pos­si­ble deal. Bad­minton says Pick n Pay isn’t in dis­cus­sion with Tesco and hasn’t re­ceived any of­fer from an in­terna- tional re­tailer in the past 10 years.

How­ever, spec­u­la­tion Tesco is look­ing to set foot into Africa stretches be­yond SA’s borders. Bryan Roberts, di­rec­tor of re­tail in­sights at Lon­don-based Kan­tar Re­tail, says there’s been spec­u­la­tion Tesco would fol­low United States multi­na­tional Wal­mart to SA. Wal­mart re­cently ac­quired a 51% stake in gen­eral re­tailer Mass­mart as it seeks to grow its pres­ence in emerg­ing mar­kets.

Roberts says SA is a mar­ket in which Tesco could do well and that would help it fur­ther re­duce its re­liance on Bri­tain’s crowded re­tail sec­tor. “So while there can be no doubt Tesco is at least think­ing about SA, how it gets in here is a dif­fer­ent mat­ter. Pick n Pay would cer­tainly suit Tesco in terms of trad­ing style (stores, pri­vate la­bel, loy­alty card, etc) but there’s ab­so­lutely no sign Pick n Pay has any in­ten­tion of be­ing ac­quired. But that doesn’t rule out the pos­si­bil­ity of Tesco tak­ing a stake and be­ing a strate­gic part­ner.”

Vianello says Pick n Pay is cur­rently not sell­able to any­body be­cause there’s too much stuff it still needs to fix, mak­ing it unattrac­tive to a re­tailer over­seas.




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