Inside Mr Price’s ambitious makeover

Mr Price, the value clothing, sport and homeware business, has never suffered from a lack of ambition. The company, which opened its very first Mr Price shop in Klerksdorp in 1985, a year before buying out John Orr Holdings, saw the future in factory shop-style shopping.

Those who bought that vision in 1988, at a share price of 28c, would have seen their investment soar 70,000%. Put another way, R10,000 invested in Mr Price in 1988 would today be worth a not-inconsiderable R7m.

Now Mr Price has a bold new vision: to become the largest retailer in Africa in terms of market value, with brands spanning the price range — lower than its current "value fashion range", as well as above, in the same range as Woolworths or TFG perhaps.

It’s ambitious, partly because Mr Price’s market value, at nearly R50bn, trails the leader Shoprite (at R91bn), as well as homeware stalwart Clicks (R62.1bn), Pepkor (R65.7bn) and Woolworths (R54bn). It’ll have to leapfrog all these larger groups.

This doesn’t intimidate CEO Mark Blair.

In an interview, Blair tells the FM that Mr Price’s top team has drawn up a 10-year grand plan according to which there will be more than the current six divisions, and it’ll be less reliant on the one eponymous fashion chain. Profits will be more consistent, and less spiky.

Durban will still be the HQ, but there’ll be a satellite office in Cape Town.

Blair admits this "major refresh" has been triggered by the recognition that all was not well at the one-time darling of local value fashion. In particular, over the past two years earnings have slipped from R11 a share in 2018 to R10.47.

The share price fell by a third, from a high of R299 in 2019 to R197 today — a steeper drop than peers such as Truworths, TFG or Woolworths over that time.

When you see earnings fall twice in three years, you know there are problems, says Blair. "Any retailer can have a bad year. But you can’t escape a trend."

This trend was conspicuous partly because it was so out of character.

For the past three decades, Mr Price’s appeal to budget-conscious shoppers meant it was able to grow earnings by an average 20% a year. But in the past five years, after 2015, it became trickier: return on capital dropped from about 68.7% to 30% last year. Foreign competitors, including Cotton On, H&M and Zara, made life a whole lot tougher for local retailers — some of which, like Edcon and Stuttafords, cracked. Cotton On did the best at building a sizeable base and eating into Mr Price’s market.

"We’re a company that thrives on winning," says Blair. "We were doing OK relative to the competition, but we certainly weren’t doing OK relative to our own track record.

"That is not who we are. We’re the guys who, over 30 years, have outperformed the market. Just to be in the pack now isn’t really us."

Blair says when he took over at the beginning of 2019, he spent a "significant amount of time connecting with people", listening and talking. "I [was] left with this overwhelming sense that we’ve got great people, they’re talking the right things but we needed to give them more platform," he says.

Which doesn’t mean anything is broken. Mr Price still has R5bn in cash, and Blair says it’s nabbed R1.2bn of market share from rivals this year. But he accepts that in terms of earnings growth, the criticism the group received from analysts was "well-deserved".

The lockdown might have been a gut punch for local retail, but it did at least give Mr Price space to think about where it went wrong and where it wanted to go, says Blair.

Perhaps the most immediately striking thing is that when the retailer emerged from the lockdown, it had gone back to the "Mr Price" brand, rather than "MRP" — to which it had rebranded itself a few years back.

But its own internal diagnosis about the business wasn’t sugar-coated either.

For one thing, the "maverick DNA" that characterised its early years had been diluted, says Blair. The group was no longer pushing boundaries and experimenting.

Instead, a "lot more subjectivity" had crept into the thinking, which derailed some of the core retail disciplines the group had in place.

Mr Price needed to again find the optimal balance between the core merchandise, which is the mainstay of the sales, and more experimental fashion merchandise. And stores needed to believe there was enough stock to back this up.

"If there isn’t this atmosphere of real trust and confidence, what tends to happen is the merchants start playing it safe," he says.

It sounds like a small thing, but it’s a big cultural issue in a company that made its name making big bets and succeeding. Blair says when this confidence breaks down, "you don’t have clarity [around your] offer and it starts breaking down quickly".

To remedy this, Mr Price made sweeping changes at the leadership level. Employees who’d been in their roles for years were shifted to different sectors.

"That’s revitalised the whole environment," says Blair.

The executives have also made a conscious effort to reward maverick thinking. It’s working, he says — people are "more confident" and the company is back to its "old ways".

"The mark of a leader is not to be making all the decisions, but to be creating an environment that people can trust and openly express themselves and let their true talent shine," he says.

Wayne McCurrie, portfolio manager at FNB Wealth & Investments, says earnings fell because Mr Price read the market wrong: it bought too much of the wrong stock, then had to discount those lines.

He sees a welcome shift now. "It’s looking far more at market surveys and, at the end of the day, it’s closer to its clients," he says.

Retail veteran Syd Vianello believes Mr Price went wrong when it misread the fashion trend a few years ago. But it limited the damage by not betting the house on risky overseas ventures (as Woolworths did).

"The group never bought anything that incurred huge goodwill costs with overseas ventures, and when [something] didn’t work … it could just write it off as a kind of misspent bit of petty cash. That’s the main thing it always did right, compared with its competitors."

Which isn’t to say it didn’t try its hand offshore. In 2003 it closed six test stores in Chile, in 2019 it left Australia and Poland, and last year it sold out of Nigeria.

But luckily for Mr Price, none of these was fatal.

About a year ago, Mr Price said it would rather concentrate on the local market. The distraction just wasn’t worth it.

Blair is quick to say this doesn’t mean Mr Price won’t venture offshore again.

"Never say never," he says. "We will continue with international searches on a very low-key basis. We’re not actively looking for anything, we just want to keep aware of what is happening internationally."

But if the group does so, it will go in with partners, rather than owning 100% outright. The model of "plonking" a business in a market it doesn’t understand means the risk of failure is too high, he says.

Clearly, any ambitious business has to take risks. However, it’s about doing this wisely, without compromising the whole.

But as analysts from Standard Bank Securities pointed out this month, Mr Price’s "capital allocation decisions have consistently outperformed its peers" over years. This, to some extent, mitigated the damage from the poor fashion choices.

Making the big bets work

When it comes to reintroducing a culture of taking the right kind of "big bets", Blair is putting his money where his mouth is.

In recent months Mr Price fired the first salvos in its new campaign.

First, in November, it bought Power Fashion, a family-owned clothing retailer with 170 stores, for a price estimated at R1.6bn. It spoke to the plan to push into the "deep value" segment, as Power Fashion sells clothes at a lower price, on average, than Mr Price. It’s the market where price rules — one long dominated by Pep.

More audaciously, in March, it swooped to buy kitchen and homeware retailer Yuppiechef for an estimated R470m. This deal brought wealthier and more aspirational customers to the group, in a market it hadn’t previously touched either.

Blair reckons it’s a deal that will also benefit Yuppiechef customers, for whom convenience is vital. "We will complement the Yuppiechef team’s kitchen skills with our homeware skills. This will bring a broader range of products to a significant customer base," he says.

Culturally, he says, the Yuppiechef team "fits our culture like a glove".

Founded in 2006 by like-minded entrepreneurs Andrew Smith and Shane Dryden in their lounge in Plumstead, Cape Town, the company has an insurgent-like approach to retail, says Blair.

And it doesn’t hurt that Yuppiechef has top-tier tech skills.

If the Yuppiechef deal speaks to the new strategy, it is that it expands beyond Mr Price’s core strength of apparel — something the group has relied on too much.

For too long, says Blair, the group’s future hinged entirely on clothing. "When [clothing] does well, the whole group benefits; when it sneezes the whole group feels it."

Covid provided the opportunity to think about changing this.

Blair says he expected that some businesses wouldn’t survive Covid, so the group analysed the market to see which companies it would want to partner with, or buy.

"We identified a few companies and that was the start of the engagement process — and six, eight months later we’ve acquired two of them," he says.

There are also plans to start a new, organic business in a new market. Blair is keeping his cards close to his chest on this.

"I don’t want a strategy that’s all organic or all acquisitions," he says. "I think they complement each other."

One of the stickier rumours doing the rounds last year was that Mr Price would buy Jet, when Edcon’s house of cards collapsed. To analysts it made sense: both retailers serve a similar market, and Mr Price had just raised a large amount in cash at the time Jet’s sale was being touted.

But Blair says he was never interested in Jet: it never met the "acquisition criteria".

Instead, Mr Price has been all about expanding its traditional reach. It has recently added a new RCS payment card, lay-bys, a range of baby items and schoolwear. It’s cut costs too — which has helped keep its operating profit margin at 17.4%, about the same level as 2019, despite the falling earnings.

Vianello says Power Fashion sits in a market that Mr Price understands well.

"It’s a business which has never gone out and gone berserk with its own acquisitions," he says. "It is run by the same team and is a family business. All Mr Price really had to do was plug it in and that’s what it’s done."

It’s also the segment of the market likely to prevail over the next five years, as a cut in civil servant wages, and an anaemic economy, weigh on customers.

"The economy will take time to come right, and if people are forced to trade down, they will trade down into categories where the new acquisition, and Mr Price, is very active," he says.

On Yuppiechef, Vianello says it’s a way for Mr Price to wet its feet with "something more exotic" without breaking the bank.

"It’s more than the petty cash, but you can’t accuse it of betting the whole house. [Yuppiechef is] well established, has a retail presence and, most important, has an online presence and can teach [Mr Price] about online retailing," he says.

So where else could Mr Price go, in a bid to become Africa’s largest retailer by market value? Food, perhaps? Blair says the group’s customers are constantly leaning on it to expand everywhere: fancy a flight on Mr Price Airways? A basket of Mr Price Food? A tipple from Mr Price Liquor perhaps?

He’s ruling nothing out, but is cautious of straying too far from the group’s origins.

"Our returns, including our return on equity, is one of the highest in the market … we don’t want to start pursuing industries with very low margin," he says.

This would suggest that food retail is unlikely right now — unless this dilution leads to much higher growth.

One of the unintended consequences of Mr Price’s shopping spree is that more and more people are asking if the retailer is perhaps keen on buying their business too.

"It’s not like we’re rushing out with our cheque book to try to spend it — we’re keeping our cash for growth," says Blair. "But it has to be the right opportunity and we have to pace ourselves properly.

"We could say yes to something one day and then a better opportunity comes along two months later that you’d rather have."

Right now, he says, there are two or three possible deals on his desk.

What about credit? Will Mr Price — a company that made its name as a cash retailer — look to sell more on credit?

Not really, says Blair. "We’re a cash retailer, but we’re probably happy having up to 20% of our sales on credit."

Mr Price is revisiting other parts of its culture too. It hasn’t been the most outwardly-focused company, and has been notoriously reluctant to engage with the media.

"We have lifted our engagement with investors and have appointed a stakeholder engagement executive so we can do the same with our other partners," says Blair.

"We think we act differently and want to be seen to act differently to our competitors on all our touch points — customers, media, investors, future employees."

It would be a welcome change.

Just how strong is the SA consumer?

Overall, analysts are betting that Blair will get it right. Six of the 11 who cover the stock call it a "buy", though the share price has rallied 58% in the past year.

But if Blair gets his game-changing assault on Shoprite’s market-leader position right, investors will be richly rewarded.

This month, a Standard Bank research report said Mr Price had made few errors during the pandemic, "providing clear focus on its future direction, coupled with some opportunistic acquisitions, which leaves it increasingly well-positioned for growth."

The analysts say its entry into the baby-and schoolwear markets "provides it with additional defensive growth markets", and it is well positioned to compete with Pep in its largely unchallenged heartland.

The market, they say, is likely to cheer its new growth strategy.

Pep might have been largely unchallenged but, as 36One Asset Management portfolio manager Evan Walker points out, there is plenty of activity at that lower end right now, with Pick n Pay clothing muscling in on the same market.

Byron Lotter, portfolio manager at Vestact, says the hiccup in recent years doesn’t detract from the overall story. "[Mr Price] had one bad season where it got its buying wrong in terms of the fashion, but it managed to turn that around quickly," he says.

This is the kind of thing that happens often, Lotter explains. Woolworths, for example, got its fashion choices wrong for three consecutive years.

I always liked that Mr Price is majority cash, it’s done well with online business and it’s branching out in different areas of retail

—  Byron Lotter

"But the fact that Mr Price turned it around quickly was testament to the management in the group. I always liked that it’s majority cash, it’s done well with online business and it’s branching out in different areas of retail."

If Mr Price’s strength has been its savvy capital allocation, the risk to that right now is that you misread the strength of SA’s consumer environment amid the pandemic, and invest too much in any one area.

Blair acknowledges it’s hard to get a handle on how fragile consumers are now, as you can’t really use last year as a gauge.

There were layoffs that affected people at the low end, and consumer confidence is low, he says.

"There are lots of challenges, but it depends on the state of the rebound and when the economy starts growing."

Wealthier customers have been more resilient — which is one reason why Mr Price wants a greater share of their wallets.

"That segment is underpinned by the ability to work from home, they weren’t taking overseas holidays, interest rates are low and the value of the JSE is high."

Similarly, Mr Price is looking at "aspirational apparel" — an interesting part of the market where younger customers aspire to own particular brands they love, like, say, Nike trainers, or sunglasses.

"We’re evaluating whether that would be an acquisition or organic growth," says Blair. It would mean a separate hub for its aspirational brands in Cape Town, which will house the creative and tech talent.

Yuppiechef may be a step towards that aspirational market, but Blair says that premium brands will never account for more than 20% in revenue.

"Though we’re making a move into this higher segment, it’s never going to be the lion’s share of the group. Our intense focus is still on value," he says.

On the other hand, the fact that Mr Price has gained 150 basis points of market share in its core "value" segment over the past year shows that this is perhaps not as vulnerable a market as some people think.

But central to Mr Price’s new strategy is the secret that has kept investors, staff and customers happy for three decades: growth.

When growth stalled, as it did in recent years, the Mr Price story stalled.

Blair understands that this is Mr Price’s proposition. He’s evidently serious about reinvigorating the energy and expanding its reach across SA’s entire retail sphere.

This suggests the recent Yuppiechef and Power Fashion deals won’t be the last big steps Mr Price makes this year.

Mr Price CEO Mark Blair says his team has a 10-year plan that will make the group rely less on the one eponymous fashion chain

—  What it means:

HISTORY: From humble beginnings

In the early 1980s, businessmen Stewart Cohen and Laurie Chiappini realised that their previous employment experiences had left them disillusioned about doing business in SA.

They believed there was a better way of doing things. Aware of the high price of clothing, they saw the value of setting up a new kind of factory shop — to sell quality merchandise at a lower price point.

“This would be a third-generation factory shop boasting attractive interiors, wanted merchandise and incredible advertising,” according to the company. “But [with] a very low cost structure to allow for low margins off high volumes.”

With Cohen and Chiappini hamstrung by a lack of funds, the early Mr Price apparel stores were franchised. The first, Mr Price’s Factory Shop, opened in Klerksdorp in 1985.

In 1986 the team bought local retailer John Orr Holdings, owner of the Miladys brand, in partnership with a bank. By 1987 the first group-owned store had begun trading from a former biscuit warehouse on Durban’s Brickhill Road.

The listed company subsequently opened more Mr Price stores, and bought out the franchised stores. By 1995, there were 237.

In the early 1990s Alastair McArthur joined the group as MD; he became CEO in 1998.

Stuart Bird, MD of the apparel division, took the reins as CEO 12 years later. He was followed by former CFO Mark Blair in early 2019.

As of September last year, the Mr Price group was operating 1,386 stores, including the primary Mr Price brand (for apparel, home and sport), as well as Miladys and Sheet Street. It’s purchase in November of the Power Fashion brand has taken the group above the 1,500-store line.

BRANDING: The value of ‘Mr Rugby’

Mr Price may not be spending as much on sports sponsorships as it did when it sponsored the Sharks rugby team. Nonetheless, it remains the technical partner of SA’s Olympics team, the Paralympics team and the Commonwealth Games team.

Now, it seems, Mr Price wants to ramp up its association with sport in the public mind.

One of SA’s favourite sporting heroes, World Cup-winning Springbok rugby captain Siya Kolisi has just signed a two-year contract to be Mr Price’s menswear brand ambassador.

Kolisi will feature prominently in the group’s marketing across TV, shop windows and digital channels.

Once a year, Mr Price says, the retailer will carry a range of “Siya’s fashion picks”, featuring the Siya Kolisi branding.

Mr Price apparel MD Donovan Baney says the thinking was that Kolisi’s reputation as “the people’s champion” would help reinforce the view of the company as SA’s “value champion”.