pick of the bunch?
Pick n Pay regains its glory
The retailer outpaced all its competitors in volume growth in one of the worst trading periods in its history, but it isn’t crowing
Fifty years ago, young Abe Gordon’s boss at Old Mutual dismissed the prospects for the about-to-be-listed retail group Pick n Pay, believing it wouldn’t have much chance competing against the strong incumbent, OK Bazaars. This was a reasonable enough prognosis, given that Pick n Pay was only 18 months old and comprised an unimpressive three stores. (Despite his boss’s view, Gordon became a long-term private investor in the retailer.)
Group founder Raymond Ackerman, who is now 87, told the FM that, at the time, he thought listing was a great idea. "My brother had just completed a case study on stock exchange listings and I thought: ‘That’s just what we need’." Ackerman was chatting after the presentation of the group’s upbeat results for the six months ended August 2018.
The group now comprises 989 company-owned stores and 686 franchise stores. And, in what was possibly one of the worst trading periods in its history, it managed to outpace all its competitors in achieving like-for-like volume growth of 3.5%.
The strong volume growth combined with significant improvements in operating efficiencies have put the group on track to reclaim its former glory as the retail sector darling. It lost this long-held status well over a decade ago when the need for cutting-edge management came second to the founding family’s commitment to remaining in control.
For several years it looked as though Pick n Pay might go the way of its former powerful competitor, OK, and end up as a slightly sad adjunct to a more aggressive, nimble player.
Eventually the controlling shareholders realised the solution lay in appointing a CEO who would not be overwhelmed by Ackerman’s history and would chart his own course. In October 2012 the board persuaded Richard Brasher, a former top executive at the UK’s Tesco, to take the job.
"It’s been interesting," was Brasher’s understated comment to analysts at the results presentation this week.
It’s been a tough time for the Brit who, despite much talk of new, more aggressive strategies, was initially unable to show results. It seemed all the competitors — Woolworths, Spar and Shoprite/Checkers — were charging ahead with even more aggressive strategies.
"On paper he [Brasher] was the right person," says Sasfin analyst Alec Abraham. "But it wasn’t coming through in the results and I was getting very despondent."
Abraham says he was expecting a 23% hike in normalised earnings but is "very happy" with the 17% because Pick n Pay has invested the difference in price reductions. "The group has been lagging the volume increases achieved by the other retailers, so it was time they started to catch up," says Abraham.
Low prices alone don’t guarantee volume increases — just ask Massmart.
Brasher’s team has also improved the environment in the store, including on-shelf availability. "We’re closer to our customers and our stores are in better shape," says Brasher. "If you lose market share when the market is doing well, you have a problem, your business model doesn’t work. If you gain market share in tough times, then the business model works."
He "suspects" Pick n Pay is gaining market share.
That the group could afford widespread discounts — prices were cut on 2,500 everyday grocery lines — and report bumper earnings growth, was down to improved operational effectiveness, with gains in labour productivity, greater levels of centralised distribution and better buying all helping to cut costs. Labour productivity benefited from last year’s voluntary severance programme, which reduced the head count by 3,500 — equivalent to 10% of the total.
Eighty percent of groceries are now distributed from centralised warehouses, which Abraham says helps to significantly reduce running costs. It also means the group is in line for increased distribution allowances from suppliers.
Andrew Bishop, of Element Investment Managers, describes the results as a good performance in a tougher-than-expected market. "Brasher has achieved a lot but he mustn’t get too confident."
It’s unlikely that Brasher will — or that the founding family will let him. They have been around long enough to know just how cyclical trading is and how unforgiving the market can be. They have been where Woolworths and its CEO Ian Moir are right now.
Five years ago it seemed Moir could do no wrong. He and his group were on a firmly upward trajectory. Now, few in the market would mourn his departure. But for Brasher and Pick n Pay, with every sign of improvement, the limited expectations of five years ago have grown into something quite demanding.
"Brasher was very positive about the much-improved fresh offering and better in-store environment — I’m not seeing that much of an improvement," says Abraham, who wants more. And he believes more is on the cards. First-half operating margins improved to 1.8% and look on target for a full-year 2.4%, up from 2.2% in financial 2018. This is still considerably shy of Shoprite’s 6.5% and is even way off Pick n Pay’s own record of 4.5%.
"They’ve still got a way to go," says Abraham.