Margin of error
CEO’S predicted 5% in doubt as analyst claims franchisees hinder growth
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.