Pick n Pay: turnaround story of the decade
After six years as CEO, Richard Brasher can say the turnaround is working. But can Pick n Pay take the next step?
Investors seem to think it’s the retail turnaround story of the decade. But while it’s indisputable that CEO Richard Brasher has finally steered Pick n Pay out of the financial wilderness, the holy grail of fatter profit margins still remains elusive.
Last week, the 52-year-old retailer unveiled its best annual results in a decade, as its pretax profit grew 24.4%. This is part of the reason why, amid something of a meltdown in retail over the past year, Pick n Pay’s share price has slid only 13.9%, compared with rivals like Shoprite (down 28.6%) and Woolworths (down 25%).
The problem is, Pick n Pay’s trading margin of 2.4% is still nowhere close to that of Shoprite which, in one of its worst trading periods in years, still produced a profit margin of 4.4%.
But Brasher, an Englishman who joined in 2013 when margins were as low as 0.5%, says it’s unfair to draw direct comparisons between Pick n Pay and Shoprite, which has a higher-margin furniture business and fewer franchises. (Of Pick n Pay’s 1,795 stores, 719 are franchises.)
"When I started, our profit margin was about 1% and I think standing up in public saying: ‘I’m going to get 5%’ just seems a bit immature, to be honest," he tells the FM.
Brasher says from 1%, it would be an "appropriate ambition" to get the company back to "its high-water mark from the past, which was somewhere between 3% and 3.5%".
He is determinedly vague on when that might happen. Asked at the company’s results presentation last week, he said: "Some time in the next 10 years."
At this point, seeing that Brasher has piloted Pick n Pay to a safer space over the past six years, investors might give him that latitude. When he took over, Pick n Pay wasn’t even in the game.
While the market tends to make adverse comparisons between Pick n Pay and Shoprite, Brasher’s company has, in fact, considerably outperformed its rival since his arrival.
Pick n Pay stock has gained 50% since February 2013. Shoprite shares, on the other hand, are only 2% firmer than they were six years ago, the company’s more than 20 years of growth having floundered in 2018. For its six months to December, Shoprite also showed no growth in sales and a 24% slide in profit.
The question is, how much more profit is there for investors in Pick n Pay?
The current analysts’ consensus isn’t factoring in anyone shooting out the lights. The 12-month target price for Pick n Pay among analysts who cover it is R72.68, marginally above its current level of around R68.
Of those 13 analysts, four reckon it’s a "buy", five rate it a "hold" and four think investors should sell.
All of which shows how hard it is to turn a ship the size of Pick n Pay around. At least, after many years spent watching rivals eat its lunch, Pick n Pay seems to be taking back market share. Sales for the 52 weeks to February 24 were 7.1% higher, while volumes were 5.1% better and that’s all despite the fact that selling prices dropped 0.3%.
Clearly, a stronger economy would help not just Pick n Pay, but all retailers, which are grappling with falling prices at the same time as administered costs, like electricity, water and rates and taxes, are soaring.
Brasher, who spent 26 years at UK supermarket giant Tesco until 2012, realises this is a threat. "The good thing about deflation is that customers love it, but it’s very hard to live with. You have to adapt and become more effective and efficient."
That’s also a big headache for food producers like Tiger Brands, AVI and Pioneer Foods.
Food prices in SA, says Brasher, are expensive relative to people’s take-home income too. In the end, customers end up paying for inefficiencies in the consumer goods production line. Retailers and producers need to come up with a better solution, he says.
"We’re all playing into a bit of a gale, but we’ve dealt with things we can deal with — looking to our costs, looking to our efficiencies, being a bit more prudent with our investment of capital, making sure we get our interest payable down, making sure we reduce our debt and all of that, I hope, came across in the results. So [while] I don’t rely on [economic growth]; I certainly would like it."
Another bright side to the results: after years of effort, Pick n Pay also appears to finally be getting its supply chain right. Three-quarters of its stock now trundles out of centralised locations, up from 65% a year ago.
"That’s quite significant," says Sasfin Securities equity analyst Alec Abraham.
"It’s close to the golden 85% level", where the group can start to rely on the distribution centres for most of its supply.
In many cases, says Abraham, as much as 40% of the space behind a typical store is used for storage. But once a store is supplied out of a centralised outlet, "you don’t need as much storage, so you can get rid of space and give it back to the landlord or use some of that space as shopfront and maybe bring in clothing".
In other words, getting Pick n Pay’s distribution right could be a big catalyst to cutting costs. "That will take them a long way to getting close to that 4.5% margin," says Abraham.
Bloomberg Intelligence analyst Charles Allen agrees, arguing that it will be "difficult" for Pick n Pay to boost profit without further cost cuts.
Asked what the company has to work on in the year ahead, Brasher says the core Pick n Pay brand could do a better job on the floor.
"We’ve become more effective in our fresh foods offer in the more affluent areas, and I think we need to put a lot of effort into the middle and lower-middle," he says.
Partnerships — such as its tie-up with low-cost digital bank TymeBank and petrol pump operator BP through its forecourt stores — are also going to be more important.
"The days of everyone doing everything on their own is not really the future," says Brasher. "The world is changing quite dramatically and the industry had better wake up and change."
At last, it seems Pick n Pay is wiping the sleep from its eyes. Whether it can take the next step will be fundamental to whether Brasher’s tenure as CEO is deemed a success.