Pep Stores ponders groceries to grab lower-income customers
PEP Stores may soon be selling groceries in addition to its traditional range of cut-rate clothing.
The chain, now owned by Steinhoff, had begun experimenting with “faster-moving consumer products” at its store in Stellenbosch, in the Western Cape, said Mariza Nel, Steinhoff’s director of corporate services.
A diversifying product base is trending in South African retail as competitors seek to capture new customers — in this case, a larger portion of the lower LSM market that shops at Pep-branded stores.
CEO Markus Jooste said: “I know they are testing a variety-store model, which will sell a bigger variety of products.
“A Pep store would traditionally have sold only apparel and footwear. But what exactly is inside and how it looks, I have not the slightest idea.”
He said he had attended a Pep brand strategic meeting two months ago. The company tested a new range of products this week.
He said experimentation would not yet have a material impact “on a company with R200-billion turnover”.
The Pep discount brand is one of 13 store brands in the Pepkor group, but is one of 50 total brands under traditionally furniture-oriented retailer Steinhoff, which acquired 92% of Pep for R62.8-billion from private equity firm Brait last year.
Alec Abraham, a senior equity analyst at Sasfin Securities, said: “The food and grocery space is highly competitive, particularly in that lower end of the market, so I would be surprised if they can offer significantly lower pricing — it’s really about grabbing someone else’s customers.”
Abraham added that Pep’s network of stores across small towns in South Africa would be an added advantage as competitors such as Pick n Pay and Massmart had been “clamouring” for that portion of market share.
According to Steinhoff’s integrated interim results to June 2015, 61% of revenue is generated within the discount segment of the market.
By way of precedent in diversification, Pick n Pay also dipped its foot into the clothing retail pond when it introduced its offering in 1975 at its Boksburg Hyper store. Its standalone clothing business opened in 1992.
“We now have clothing in around 120 supermarkets and a further 140 standalone Pick n Pay clothing stores,” said David North, Pick n Pay’s head of strategy and corporate affairs.
He added that the retail market was a dynamic environment, with some businesses growing and some declining as they were being usurped by new innovators.
Steinhoff’s Nel said the testing of the new food products would take time to reap significant rewards. “In South Africa alone we have more than 2 000 stores. This offering will trade for a long time before we make a decision, so it’s really small and insignificant.”
Sasha Naryshkine, a retail analyst at Vestact, said: “[Pep’s] business model is geared to bringing people lower prices. That’s good for fighting inflation, which is good for the interest rate outlook — which is good for everybody, especially in lower LSMs where the inflation rate effectively eats their buying power.”
Naryshkine added that retail had “ramped up significantly”, as it now contributed to GDP with a recorded 2.7% retail-trade sales growth year on year in September 2015, according to data complied by Stats SA.
As grocery retailers look into strategies to draw in more customers while competing with the expanded footprint of the generalised retailer, South Africa’s largest food retailer, Shoprite — whose biggest shareholder is Christo Wiese — may already have its hands on Pep’s market share.
“Wiese is the biggest shareholder in both Pep and Shoprite,” said Abraham.
“I don’t know if there is going to be some sort of arrangement between Shoprite and Pep, but I wouldn’t put it past them. You don’t know what they talk about in Stellenbosch.”
The food and grocery space is highly competitive in that lower end