New broom at PnP brushes up results
But Brasher says turnaround strategy still has a long way to go
PICK n Pay has left it pretty late in the retail cycle to launch an aggressive roll-out of stores compared to previous years, to claw back market share.
Retailers across the board are opening up stores in big numbers and it is a strategy that analysts have panned as pretty pointless, because all they appear to be doing is cannibalising their own market.
But because Pick n Pay has fallen so far behind its rivals this store-opening plan may yet work, and many say the roll-out was spot on.
Whereas rivals such as Shoprite and Spar have opened many new stores in recent years, Pick n Pay was much slower.
So why is it opening so much new space now, especially when consumers are under great pressure and when growth forecasts are muted?
Richard Brasher, the British former head of Tesco who was parachuted in last year to lead Pick n Pay’s turnaround, admitted that the retailer was not even in the race for space until recently.
“What we needed to do was open shops in places that we didn’t trade in — and if there was cannibalisation it wasn’t ours,” he said.
“There are many parts of the country where we remain under-represented,” he said.
Those are fighting words from the man leading a turnaround that has taken longer than people expected, but has jolted forward under his leadership.
Still, there are clear green shoots: the cost base has been cut, the supply chain enhanced, and Brasher is now fixing the stores.
Pick n Pay is opening space across communities in SA, from The Waterfront to KwaMashu, but importantly in periphery areas where historically it has not been very well represented.
Perhaps, having learnt from bitter experience in the retail sector, Brasher is someone who does not like to over-promise.
Asked where he rated the turnaround on a scale of one to 10, he responded: “Three.”
Still, investors seem to be buying Brasher’s plan.
The share price has vaulted 29% in the past year, whereas Shoprite’s fell 2.9%, Spar rose only 6.2% and Woolies is up less than 1%.
Now, for the first time in three years, investors can look at Pick n Pay’s numbers and see evidence that Brasher’s plan is bearing fruit.
This week, Pick n Pay released financial results for the year to March which showed a turnaround in margins (up to 17.5% from 17.4% last year); an increase in sales (up 7.7% to R63.1-billion); improved trading profit (up 18.5%, and 34.4% on a comparable basis after three successive years of decline) ; and a rise in headline earnings per share (up 24%).
This was all the more commendable given that the past trading year consisted of four fewer trading days than the previous year.
But this roll-out of new stores across the retail sector is not to everyone’s liking.
Evan Walker, portfolio manager at 36ONE Asset Management, said doing this at a time when GDP was so muted was the wrong approach.
“The whole market is doing that. Pick n Pay is catching up, but the net effect is that the cannibalisation is getting aggressive and we think the amount of capital being deployed is far too aggressive,” he said.
Walker believes all retailers — including Pick n Pay — will come to regret this strategy.
“They’re defending market share rather than growing shareholder returns. In the short term they just seem to be doing exactly what happened internationally in the race for space,” he said.
“They’re cannibalising themselves to death here.”
That strategy aside, the experts believe things are looking up for Pick n Pay — finally.
Alec Abraham, analyst at Sasfin Securities, said the financial results were better than expected.
“We see things coming together . . . all of a sudden the bet against Pick n Pay as a turnaround story is no longer a one-way bet,” he said.
Abraham reckons the difference is Brasher, saying “until now, Pick n Pay has never had the right person for the job”.
But the fact is, Pick n Pay has not stopped losing market share. This is clear from the fact that overall, Pick n Pay grew sales by 7.1%, while the market grew 7.8%. The silver lining, however, is that the year before, Pick n Pay grew 6.4% while the market grew 8.9% — so at least it is shedding market share at a slower rate.
In the six other African countries where Pick n Pay operates, it was a real good news story.
Revenue grew 27.9% to R3.2billion (still less than 10% of the group’s total), while profit before tax rose 55.6% to R140.4million.
The group opened 111 stores in the year, and closed 26 underperforming ones, adding 3.4% net new space.