NOT ALL FUN AND GAMES
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.
Group executive of Pick n Pay