NOT ALL FUN AND GAMES

Finweek English Edition - - COVER -

Due to chronic un­der­in­vest­ment in its own oper­a­tions and a fu­tile fix­a­tion on its strug­gling Aus­tralian su­per­mar­ket group (in the end, Franklins was sold off), Pick n Pay was bleed­ing money and mar­ket share when ex-Tesco ex­ec­u­tive Richard Brasher took the reins in Fe­bru­ary 2013.

The com­pany has since made solid progress i n ad­dress­ing some of its op­er­a­tional prob­lems, with fo­cused fi­nan­cial con­trol , bet­ter capit a l man­age­ment and ag­gres­sive cost-cut­ting end­ing a “lengthy pe­riod of spi­ralling costs”, ac­cord­ing to its latest re­sults state­ment. For the year to end March, its head­line earn­ings jumped 28% with trad­ing ex­penses in­creas­ing only 3.8% on a like-for-like ba­sis. And while still unim­pres­sive com­pared to Shoprite’s 5.6%, Pick n Pay has i mproved its trad­ing mar­gin markedly to 1.9%.

Still, a large piece of the turn­around puz­zle re­mained miss­ing. Brasher promised a “con­sumer-driven, sales-led” re­cov­ery, but this has not ma­te­ri­alised. Sales grew only 6.1% to R66.9bn in the last year. This was blamed on the clo­sure of some 40 un­prof­itable stores over two years, and f inan­cial pres­sure on cus­tomers.

In the same de­pressed en­vi­ron­ment, Shoprite (+11%) and Wool­worths Foods (+13.5%) man­aged size­able turnover growth. Clearly Pick n Pay was still los­ing mar­ket share to other re­tail­ers, al­beit at a slower rate than be­fore.

Can Sti­keez help turn this around? One store man­ager told Fin­week he saw strong dou­ble-digit growth in sales since the in­tro­duc­tion of Sti­keez in early Au­gust, but a source close to the com­pany says some re­ports that group sales grew as much as 12% to 15% due to the cam­paign were “laugh­ably” un­re­al­is­tic. (The re­tailer is in a closed pe­riod and did not want to com­ment on the fi­nan­cial im­pact.)

Alec Abra­ham, re­tail an­a­lyst at Sas­fin Bank, does not think Sti­keez will have a last­ing, sub­stan­tial ef­fect on sales. He be­lieves the com­pany should con­tinue to fo­cus on strength­en­ing its cen­tral dis­tri­bu­tion struc­ture, which can help it to en­ter the only area of re­tail that of­fered strong growth in re­cent years: con­ve­nience stores.

Pick n Pay has fallen far be­hind other lo­cal re­tail­ers in be­ing able to sup­ply its stores with the prod­ucts they need, as they need it. For many years, other re­tail­ers have in­vested in so­phis­ti­cated cen­tral dis­tri­bu­tion struc­tures that can de­liver the right prod­ucts in time. This means their stores can be smaller be­cause on­site stor­age isn’t nec­es­sary – shelves are re­plen­ished as needed.

Due to a dys­func­tional cen­tral dis­tri­bu­tion sys­tem, Pick n Pay stores still re­main re­liant on di­rect de­liv­er­ies from sup­pli­ers. Con­se­quently most Pick n Pay stores have to store prod­ucts in big on­site ware­houses, which ac­cord­ing to Abra­ham can take up to 50% of f loor space. “They are pay­ing re­tail rentals on ware­house space.” If Pick n Pay can get its dis­tri­bu­tion right, the stores wouldn’t need so much ware­house space – this will

save on rent, or stores can in­crease the size of their shop f loor, adding to sales.

Ham­strung by it s prob­lem­atic dis­tri­bu­tion sys­tem, Pick n Pay has not been able to cap­i­talise on the strong trend to­wards smaller con­ve­nience stores, where Wool­worths and Spar have led the way. For many house­holds, the large monthly or weekly shop at big stores are quickly be­ing re­placed by an al­most daily stop at smaller out­lets, says Abra­ham. This is partly due to time con­straints as in many fam­i­lies both par­ents are now work­ing, but also part of the trend to­wards fresh pro­duce and qual­ity ready-made meals.

This g r ow­ing f ood aware­ness has con­trib­uted to Pick n Pay’s painf ul mar­ket share l oss a mong up­per-in­come clients, who now s hop at Wool­worths. Abra­ham be­lieves it will be dif­fi­cult to re­verse this; Pick n Pay has fallen too far be­hind in de­liv­er­ing the same food i nno­va­tion and qualit y of­fer­ing, par­tic­u­larly in fresh foods. Gil­mour agrees: “Wool­worths is just streets ahead.”

And tr ying to grow sales in the lower in­come seg­ment (through its Boxer chain) also won’t be easy, as Shoprite built a for­mi­da­ble store struc­ture serv­ing these clients while Pick n Pay was dis­tracted by it s ven­tures in Aus­tralia. Shoprite used much of its R8bn rights is­sue in 2012 to ex­pand ag­gres­sively in peri-ur­ban and ru­ral ar­eas, as well as in the rest of Africa, and pre-emp­tively se­cured the best sites for its new stores, mak­ing life dif­fi­cult for en­trants like Pick n Pay and Mass­mart. Shoprite’s es­tab­lished dis­tri­bu­tion net­works (and sunk costs) in these ar­eas have added to its com­pet­i­tive cost ad­van­tage.

There are some fac­tors in Pick n Pay’s favour. An­a­lysts ex­pect the full ben­e­fits of its Smart Shop­per Card ini­tia­tive will only be felt in com­ing years, as the com­pany starts ben­e­fit­ting from match­ing pro­cure­ment with the data mined from con­sumers’ shop­ping his­to­ries. Also, the com­pany is mak­ing some in­roads in Africa, and fur­ther im­prove­ments in its cen­tral dis­tri­bu­tion struc­ture and trad­ing mar­gins should trans­late into earn­ings gains.

It is ex­pected that Sti­keez may also re­sult in a welcome sales bump. Still − ad­dress­ing Pick n Pay’s main struc­tural and legacy chal­lenges, while weath­er­ing an eco­nomic down­turn, will prove a stick­ier prob­lem.

Richard Brasher

Group ex­ec­u­tive of Pick n Pay

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