Price war hots up in SA’s food sector

Pick n Pay cuts cost firm R1bn, as rivals join fray

APRICE war appears to be brewing in SA’s food retail sector. It has all the makings of being as bitter as that which has raged in the UK market for the past two years.

Pick n Pay CEO Richard Brasher is reluctant to provide a definitive view on the risks this would create. “I am always nervous to talk about a price war but the reality is that competition is intense,” he says.

Warren Jervis, an analyst at Old Mutual Investment Group, is far more blunt.

“Anyone who thinks the chances of a price war are low is seriously understating the risk,” he says.

In its half-year to August, Pick n Pay cut the prices of 1 300 everyday items by between 10% and 20%. By this month, the company founded by Raymond Ackerman, had slashed prices on another 500 items. In all, these cuts will cost Pick n Pay R1-billion for its full year to February.

What this means is that Pick n Pay kept its internal inflation to just 3.1% – less than half the national figure for food inflation of 6.9%. This isn’t just happening at Pick n Pay. Shoprite’s figures for its year to June show it also cut prices by R1.8-billion.

This may be why investors are fleeing. Pick n Pay’s stock is down 11.5% over the past year, SPAR is down 11.6% and Woolworths is down 26%. Only Shoprite rose, by 10.4%. Amid all these ominous signs, Pick n Pay is taking a defensive posture.

“In our past year we took corrective action to make us more resilient in these highly uncertain economic times,” says Brasher.

Here, “corrective action” includes a voluntary severance programme – the first in its 50-year history.

“We cut staff numbers by 10%, mostly in supermarkets,” says Brasher. The culling of 3 500 staff cost Pick n Pay R200-million.

The retailer also pulled out all the stops to control costs – including trading expenses, which rose only 1.6% on a like-for-like basis. “Pick n Pay’s operatingexpense control was excellent,” says Daniel Isaacs of 36One Asset Management.

“But you can only take cost control so far. [It] needs top-line sales growth.”

This is the essence of Pick n Pay’s problem: sales growth is hardly inspiring. Overall, sales lifted 5.1% to R39.3-billion; on a like-for-like basis, this was only actually 1.8% higher.

Still, Brasher’s company was able to squeeze out an 11.6% rise in headline earnings – but thanks to cost control and a rise in trading margin from 1.5% to 1.6%, rather than growth.

Trading margin, at 1.6%, is still low compared to Shoprite (5.7%), Woolworths’ food division (7.1%) and Spar (2.5%). Brasher admits he “would have hoped to have seen it higher by now”.

This low trading margin gives Pick n Pay little room to manoeuvre in an all-out price war.

Shoprite, as aggressive as ever under Pieter Engelbrecht, is dead set on hiking its market share from an already dominant 31.9%.

Last year it lifted sales in its SA supermarket arm 10.4% to R101.7billion, growing twice as fast as the market.

Engelbrecht makes no secret of his desire to grab customers from the higher-income groups — traditionally the domain of Woolworths. Shoprite’s key weapon: its new-generation Checkers stores. Last year, it opened eight. This year it plans to open 14. Analysts are impressed.

A key part of Shoprite’s plan is to launch new convenience food products, the sort of ready-made meals that have made Woolies foods a staple for executives.

Last year, it launched 135 new, private-label convenience food products, and it has added 100 this year so far. Its line-up includes 400 different varieties of cheese and wines. But pricing will also be a key factor in Shoprite’s battle against Woolworths.

“Our annual [food and liquor] sales are R131-billion and Woolworths [are] R27-billion so it is obvious our volume enables us to offer better value,” says Engelbrecht.

It’s a brash move – but Sasfin Securities analyst Alec Abraham believes Woolworths can hold its own. “I do not see Checkers as a big threat to Woolworths – but it is to Pick n Pay and Spar’s SuperSpar stores,” he says.

Though Woolworths is frail (thanks to its Australian purchase of David Jones), its food division is strong. For its year to June, Woolworths’ food division recorded an 8.6% rise in sales and an 8.3% rise in operating profit. many overworked

CEO Ian Moir, as confident as ever, told analysts: “Our food sales growth continues to be well ahead of overall market growth.”

Moir will be glad of that, given how poorly the rest of Woolworths is performing. Overall, its earnings fell 7.6%, with its local fashion business nursing a 6% fall in pretax profit.

Another retailer struggling to keep its head above water is Spar. In its half-year to March, Spar’s wholesale food and liquor sales in SA grew only 5.4% to R32.5-billion. But that was mostly due to Spar’s internal inflation of 8.2% – a level that will do nothing for its competitiveness.

This suggests that for investors looking at food retail, it’s between Shoprite and Pick n Pay. Abraham goes for Pick n Pay. Isaacs is backing Shoprite: “[Its] Checkers initiative has yet to really kick in.”

Though it’s still early in the battle, it would be hard to bet against Engelbrecht’s company. — DDC