Straggler Pick n Pay picks up speed
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.