Seeking sweet spot twixt margin and mass appeal
Sales-led turnaround faces truest test as downturn hits shoppers’ wallets
PICK n Pay will release its annual results later this month, with most investors eager to see whether the retail group has been able to continue edging its margins wider to cap one of the sector’s more notable turnarounds in decades.
After losing top-end market share to Woolworths and finding itself up against behemoth Shoprite at the bottom end, Pick n Pay has had to tread a fine line between competing on price to win back customers and having enough ammunition to invest in such competitive pricing.
From Pick n Pay’s heyday of trading profit margins of just more than 4%, nearly all of that margin was squeezed, down to as low as 0.8%.
Woolworths and Shoprite both enjoy healthy margins of around of 6% and upwards, which — in a slow economic growth environment and rising interest rate cycle — position them well to absorb price inflation.
Since taking the reins in 2013, CEO Richard Brasher has insisted on a sales-led turnaround, entailing winning back market share and increasing volumes. He still has some levers left to pull, according to Avior Capital Markets equity analyst Kyle Rollinson. Clever campaigns like Stikeez got customers flooding through the doors again.
“The business looks in a better state than it was two or three years ago, but some execution risk remains.
Given the chain’s massive footprint, any margin growth will quickly reflect in the company’s bottom line
Pick n Pay is not competing in a market where consumers are doing well and competitors are doing badly. Consumers face further pressures through the course of 2016, including food price inflation,” said Rollinson.
This will make it difficult for Pick n Pay to achieve the margin uplift it is after. After raising margins successfully in 2015’s results, Brasher elected to plough that straight back into pricing.
If this year’s figures fell short of continuing that arc, or top-line revenue growth did not indicate some clawed-back market share, Rollinson said, investors may pull back.
Trading at a lofty price-to-earnings ratio of about 30%, the share is priced for no missteps.
Sasfin Securities analyst Alec Abraham said progress made in centralising Pick n Pay’s distribution would be another important signal of eliminating duplicated costs.
He said Pick n Pay was aiming for at least 80% of shelf stock to come from its centralised distribution centres in order to do away with the mini-distribution centres attached to stores, and it could take as long as 18 months from the present position — possibly as high as 60% — to cutting those costs entirely.
In the same vein, 36ONE Asset Management analyst Jean Pierre Verster said the costs of creating the centralised distribution facilities, as well as setting up the IT to support its Smart Shopper initiative, have largely been worked out of its cost base. This should position Pick n Pay
BOXING SMART: Pick n Pay is having to strike a fine balance between keeping prices at appealing levels and growing its margins to start reaping the full benefits of its streamlining and its price-competitive Smart Shopper initiative, which could also allow the retailer to sell information to food producers and boost targeted marketing campaigns to help drive the volume growth Pick n Pay wants.
Given the chain’s already massive footprint, Abraham said any margin growth would quickly reflect in the company’s bottom line.
Verster said this would be welcome news for investors who — given the recent rally in Pick n Pay’s share price — seem to expect that gross margin uplift can offset any reduction in sales volumes, especially at Pick n Pay’s lower-end Boxer brand stores, where consumers are most vulnerable to food inflation linked to the drought. At present levels, Pick n Pay is trading around its all-time highs and over the past two years alone has gained 38%. Over the same period, Shoprite, Africa’s biggest grocer, has remained largely flat.
The sector’s top performer over the period has been Spar, which has gained close to 64%, while Woolworths is up 25%.