It might be telling that while Shoprite makes much of its trading profit margin right upfront, you have to wade through 12 pages of numbers before you get to Pick n Pay’s.
And a direct comparison is hardly flattering: Shoprite pulled off a 6.1% trading margin for the year ended July, but Pick n Pay remained a considerable laggard with just 2.3% at the half-year ended August. Once again, its shares lag its fiercest rival: Pick n Pay stock has gained 18% year to date, but Shoprite shares are up 37%.
It is surely one of the issues that new CEO Pieter Boone, who arrived in SA at the end of February, has to confront.
It has hardly been an easy start for the Dutchman so far: five months into the job, Boone had to steer the group through the looting and civil unrest in July that devastated retailers, particularly in KwaZulu-Natal (KZN).
He describes the July incidents as "heart-breaking".
Of its stores, 212 were damaged and looted, and it closed 551 as a precautionary measure to protect staff and customers. That cost it R930m in lost sales. Thanks to insurance, while the top line was affected, it’s not as significant in terms of profitability. Already, about R600m has been paid out.
But the disruptions continue into the second half of its financial year: of the 212 stores that were affected, 45 have not yet reopened — 27 of them in its fast-growing Boxer chain. Boxer was disproportionately affected by the looting, having been founded in KZN.
Overall, gross profit fell 3.4% to R8.4bn for the period, with the gross profit margin lower at 18.2% of turnover. Comparable profit before tax jumped 86.3% year on year, against a highly disrupted base.
But Boone is no newcomer to emerging markets and says he’s used to facing challenges of a macroeconomic or political nature. He started his retail career as a management trainee in SHV (a founding partner of Makro in various parts of the world, including SA). He worked in Asia for 14 years in the Philippines, Indonesia, Malaysia and Thailand; in Latin America for 4½ years; in Russia; and most recently in Europe, where he was COO at German multinational and wholesaler Metro AG.
Boone is sticking with his predecessor Richard Brasher’s plan to push Pick n Pay into the value forefront with Boxer, which he describes as a "gem" and which, for the first time in a results presentation, was featured alongside the Pick n Pay brand logo.
"This is a big opportunity for us. The good news is that between Boxer and Pick n Pay Value, we are gaining market share in this segment," he says.
Pick n Pay expects the food and grocery market to grow by R200bn over three years, with most of this coming from the lower-income part of the market. While its share of the total formal grocery market is about 16%, it holds only 11% of the less affluent sector, and wants to add 200 new Boxer supermarkets to the group over the next three years.
But some are sceptical. Alec Abraham, senior equity analyst at Sasfin, says Pick n Pay’s plan to effectively double the Boxer store network is ambitious. "I don’t know if it’ll be able to achieve that, considering that this year it opened seven stores." Abraham says the group has much competition from Shoprite, though it’s not the latecomer to lower-end food retailing that Massmart was.
Pick n Pay did look at buying the Cambridge Food and Rhino assets from Massmart, but it was confident it could grow Boxer better, faster and cheaper without a deal, says Boone.
There’s also tough competition at the top end. Abraham says the market share that Checkers is taking at the top end is not from Woolworths, but Pick n Pay and Spar. "There’s an onslaught in its traditional market and it will be tough at the bottom end. Yes, it will increase its market share, but I don’t think as much as it would like."
So is there any chance Pick n Pay could attain the same margins as Shoprite?
Evan Walker, portfolio manager at 36One Asset Management, says Shoprite’s margins are world-class, and probably too high for a fast-moving consumer goods company which needs at times to invest in price. "It’s a very efficient business and very well run; it invested heavily in distribution centres."
Pick n Pay, he says, "is a different business in that it’s got a lot of different elements to it which all need to pull together. It’s doing a better job, but it’s still a long way off."
36One argues that the supermarket business at Pick n Pay makes very little money at the moment. "We think most of the money gets made in Boxer, in the franchise business and in Pick n Pay Clothing." Corporate stores and hypermarkets drag down group margins, and the supermarket division is still mediocre, he says.
Boxer and Pick n Pay Clothing were, indeed, the standout performers in its latest numbers.
Boone describes Pick n Pay Clothing as another jewel. "In an increasingly competitive market, our clothing sales, including those sold within our supermarkets, grew more than 26% year on year. We have gained nearly 1% in clothing market share since financial year 2019, including in the critical, highly competitive women’s category. Nearly 40% of our clothing is locally produced and we have been working with local designers in custom limited editions."
The group’s online on-demand delivery service, Pick n Pay asap!, has grown 200% since it was launched in July, and Boone says it’s critical to the future of the group. Seventy-six more sites will be added to this network by the end of the year, which will allow access to on-demand facilities for half of the supermarkets in the group by the end of the financial year.
It’s in the core Pick n Pay business that much still needs to be done, says Boone.
So far, Pick n Pay has reinvigorated 24 stores with more premium offerings such as fresh food and plant-based meals in more affluent areas. It’s seen higher traffic and stronger sales, and further upgrades will be done.
Costs won’t be spared either. The group has taken out about R1bn in expenses and the second phase of "Project Future" aims to save about R3bn, which will be reinvested in price.
Already, internal selling price inflation was contained at 3.6% year on year, against consumer price index food inflation of 6.5%.
Pick n Pay is also opening a new distribution centre in Gauteng to replace its Longmeadow facility as the central hub in the province. The new centre will be 45% larger than the old one, add 50% throughput capacity and "enable the group to increase productivity and reduce costs", he says.
Boone has been a regular visitor to SA since 2008. "We have a curiosity to get an understanding [of] how the country works. There are fantastic opportunities here; it will require some structural reforms in the country, but it’s a gemstone."
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