Strag­gler Pick n Pay picks up speed

Finweek English Edition - - INSIDE - BY SHOKS MZOLO ed­i­to­rial@finweek.co.za

Pick n Pay is mak­ing head­way with its turn­around strat­egy, with the clo­sure of un­prof­itable stores, cost-cut­ting and a more ef­fi­cient sup­ply chain help­ing to boost profit in the 52 weeks to 1 March.

Richard Brasher, who was hired from UK-based gro­cery chain Tesco in Fe­bru­ary 2013 to help turn around the ail­ing re­tailer, has suc­ceeded in sta­bil­is­ing the busi­ness. The gross profit mar­gin im­proved by 30 ba­sis points to 17.8%, thanks to im­prove­ments in ef­fi­ciency across the sup­ply chain. Same-store turnover also in­creased, grow­ing by 3.6% – an im­prove­ment, but still lag­ging its ma­jor com­peti­tors Wool­worths and Sho­prite.

The group’s trad­ing mar­gin im­proved from 1.3% in the 2013 fi­nan­cial year to 1.9% for the pe­riod un­der re­view – still a far cry from 2010’s 3.3%. (Sho­prite’s trad­ing mar­gin for six months ended De­cem­ber was 5.23%.)

“The mar­gin is not near where it needs to be. Mr Brasher can com­fort­ably say that he’s sta­bilised the op­er­a­tion. But it’s still go­ing to be a long and dif­fi­cult jour­ney. Growth is go­ing to be very dif­fi­cult in this cli­mate,” says Chris Gil­mour, an­a­lyst at Absa In­vest­ments, not­ing that the mid­dle class, faced with high lev­els of house­hold debt and ris­ing living costs, re­main un­der pres­sure.

In the lower-in­come mar­ket seg­ments, where Pick n Pay owns 180 Boxer stores, it faces tough com­pe­ti­tion from Sho­prite (through USave) and Mass­mart (through Cam­bridge Food). On the

up­per end of the mar­ket, where Pick n Pay once dom­i­nated the food re­tail space, Wool­worths has made sub­stan­tial in­roads in re­cent years.

Brasher may have sta­bilised the busi­ness; turn­ing around the ship – dubbed “stage 2” of its turn­around plan – for the group to achieve sus­tain­able long-term growth (“stage 3”) will be much harder.

It has al­ready started to lay the foun­da­tions: it closed 40 un­der­per­form­ing stores over the past two years, started re­fur­bish­ment work on its hy­per- and su­per­mar­kets, im­proved pric­ing and made progress with a cen­tralised sup­ply chain, an area where it lagged its main com­peti­tors. The group plans to in­vest over R5bn in new stores and re­fur­bish­ments over the next two years, chair­man Gareth Ack­er­man said.

As part of stage 2, it will im­prove the pro­duc­tiv­ity of its dis­tri­bu­tion cen­tres and add ad­di­tional ca­pac­ity, cen­tralise more sup­pli­ers and fo­cus on its fresh sup­ply chain, Pick n Pay said.

In­vestors were buoyed by the lat­est re­sults, but the per­for­mance of its share price, down 6.4% over the past year, still lags its ma­jor ri­vals and the over­all mar­ket. Wool­worths is up nearly 40% over the same pe­riod, while Sho­prite is up 0.2%. The JSE’s Alsi is up 16.4%.

“Some peo­ple ar­gued that we should do things faster,” Brasher told Finweek in an in­ter­view. “We would like to go back to where we were, but th­ese things don’t hap­pen overnight.” Just how far Pick n Pay plunged from its glory days is ap­par­ent when you con­sider that its lat­est net profit of R862m, up an im­pres­sive 74% since 2013, still falls short of the R1.05bn it re­ported in 2009.

Ques­tions re­main, how­ever, about its ex­pan­sion strat­egy, par­tic­u­larly as its clo­sure strat­egy af­fected its op­er­a­tions in Mau­ri­tius and Mozam­bique. The group, which ex­panded its foot­print in Namibia and Zam­bia over the past year, now has a pres­ence in seven South­ern African states. Of its nearly 1 200 stores (which in­cludes 52 shops owned by Pick n Pay as­so­ciate TM Su­per­mar­kets in Zim­babwe), only a tenth is out­side SA.

In­stead, Pick n Pay should ex­pand in Sub-Sa­ha­ran Africa’s “money-spin­ning mar­kets”, says Miye­lani Mkha­bela, direc­tor at Antswisa Man­age­ment Group, a con­sul­tancy. In the 2015 f inan­cial year, only R3.7bn, or 6%, of the re­tailer’s rev­enues came from out­side SA.

It has some catch­ing up to do. Sho­prite, with 2 020 out­lets and op­er­a­tions in 15 coun­tries, earned nearly 12% of its trad­ing profit for the six months to end De­cem­ber out­side SA. Th­ese su­per­mar­kets are also the high­est-growth area in the busi­ness, boost­ing rev­enue by 15% over the pe­riod, com­pared with 12% growth in sales from lo­cal su­per­mar­kets.

Pick n Pay, which has mainly been fo­cused on South­ern Africa with the ex­cep­tion of a dis­as­trous ex­pan­sion to Australia that ended af­ter nine years when it sold its Franklins busi­ness in 2010, plans to launch its f irst store in Ghana, Brasher said. He con­sid­ers Africa a “sec­ond en­gine of growth”.

How­ever, West Africa will be a tough nut to crack. In ad­di­tion to chal­lenges such as in­fra­struc­ture and the way of do­ing busi­ness, Pick n Pay will face stiff com­pe­ti­tion from over­seas ri­vals, as well as Sho­prite and Mass­mart, which are al­ready es­tab­lished in the re­gion.

For now, Pick n Pay is tak­ing it one step at a time. “We look at Nige­ria, East Africa – there are pow­er­houses there – but we’re not in a rush to get it wrong. We’re ap­ply­ing [to Ghana] the same ap­proach we did in Zam­bia,” Brasher says, ex­plain­ing that the key was to move one step at a time and be flu­ent with both the po­lit­i­cal and eco­nomic sit­u­a­tion.

En­cour­ag­ingly, the busi­ness is in “much more able en­vi­ron­ment”, as Brasher puts it. “Yes, we are happy with where the busi­ness is, but it’s only a start. We’ll be hap­pier next year.”

In­vestors would hope so. As it is, the share is “priced to per­fec­tion” with an ex­pen­sive P/E ra­tio of 30, says Gil­mour. “There is no room for slip-ups. Peo­ple are watch­ing this care­fully.”

JUST HOW FAR PICK N PAY PLUNGED FROM ITS GLORY DAYS IS AP­PAR­ENT WHEN YOU CON­SIDER THAT ITS LAT­EST NET PROFIT OF R862M, UP AN IM­PRES­SIVE 74% SINCE 2013, STILL FALLS SHORT OF THE R1.05BN IT RE­PORTED IN 2009.

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