Pick n Pay chair Gareth Ackerman spent much of the recent AGM roundly (and appropriately) tearing into the government for the damage it has inflicted on the economy.
He also reminded those attending the event of the position of the controlling shareholders, the Ackerman family. It is little changed since the company listed more than 50 years ago and investors are aware of it when they buy into the company, said Ackerman.
Yet the group’s trading update — pointing to a possible first-half loss, which would be the worst set of results in its history — has some analysts questioning whether this control structure isn’t causing as many challenges as the government’s inept handling of the economy.
“Until the controlling vote is removed the company will not move forward,” independent retail analyst Syd Vianello tells the FM. He believes that under the family’s control, the board made key strategic errors that allowed Shoprite to make initial inroads into the market several years ago and then steadily build up a seemingly impregnable dominant position.
Industry sources say Shoprite is circling Pick n Pay like a ravenous shark that smells weakness.
But luckily — for the Pick n Pay board, at least — this control structure means that once again it won’t have to engage with its shareholders on the prickly issue of executive remuneration, notwithstanding the retailer’s dismal performance. Thanks to the Ackerman family’s B ordinary shares, which voted 100% in support of the two remuneration-related advisory resolutions, the “No” tally was kept just below the crucial 25% level.
Essentially they replaced one inefficient structure with a slightly less inefficient one
— Chris Logan
Yet 34% of ordinary shareholders voted against the group’s remuneration policy, and 40% against the remuneration implementation report. But thanks to the family’s 100% backing, the total vote against the policy was held at 20% and against its implementation at 24%.
Likewise, the B ordinary shares spared the board the embarrassment of a vote against the special resolution required for the payment of directors’ fees; 26% of ordinary shareholders voted against this resolution but again, directors were saved by the family’s 100% support.
Chris Logan, chief investment officer of Opportune Investments, who won a drawn-out battle with the board to have the controlling pyramid structure removed back in 2016, says it was only a partial victory. “They removed the PikWik holding company but created the B ordinary shares; essentially they replaced one inefficient structure with a slightly less inefficient one.”
Logan acknowledges the important role founders play in the direction of a company. “There’s what’s known as the ‘superior leadership period’, but the superiority tends to dissipate over time.”
Inappropriately generous dividend payments over the years meant the board was not making the necessary investments in ensuring the business was at the cutting edge and able to fend off all newcomers. “The family resisted doing things that should have been done 20 years ago,” says Vianello.
Centralised distribution is a standout example.
Sasfin’s Alec Abraham says Pick n Pay should have switched to central distribution years before it did. He believes that part of the group’s current woes relates to the legacy of being so late to make the move. “They’re still trying to fine-tune their system while their main competitor has been running an extremely finely tuned system for years already,” says Abraham. He says it’s not clear if the group’s distribution facilities adequately or efficiently reach into peri-urban areas.
This has significant implications for the increasingly important Boxer division, with questions about the group’s ability to distribute to the growing number of Boxer stores across the country. During the four-month review period Boxer achieved a comparatively impressive 15.4% sales increase, against the entire group’s 0.3% like-for-like drop. But Boxer’s performance is merely in line with Shoprite and USave, which have just reported 15.6% sales increase for the 52 weeks to end-June 2023. And taking into account internal price inflation of 9.5% at Pick n Pay, like-for-like sales for the group actually declined almost 10%.
“After you make one major strategic error, it’s very difficult to catch up,” says Abraham. Part of that catching up could be seen in the need to switch over from its Longmeadow Distribution Centre to the new, bigger and better-located Eastport DC. This involved R110m in duplicated supply chain costs during the four months to end-June.
But there’s no doubt that Eskom caused the most damage. Apart from the horrendous disruption to the lives of consumers, total diesel costs to run generators for the four-month period were R300m.
An additional abnormal cost is the estimated R250m restructuring cost, much of which relates to voluntary severance payments.
In all, the R610m of abnormal costs are expected to wipe out all of the first-half profits — hence the expected first-half loss, the first in the group’s history.
In a vicious downward spiral, the hefty “abnormal” costs exerted so much pressure that promotional pricing pressure was not much of an option for the group. This meant it struggled to grab its share of a weak consumer market, which no doubt contributed to the need for severance payments.
After you make one major strategic error, it’s very difficult to catch up
— Alec Abraham
“Sales momentum recovered towards the end of the period as reduced load-shedding in June and early July enabled Pick n Pay to intensify its promotional programme,” says the company in its trading update. Encouragingly, on a like-for-like basis sales were up 2.9% in the last three weeks of the period.
It’s still a woeful comparison with Shoprite, however. This week, its chief rival flagged a 17.8% rise in sales for the 52 weeks to July 2, with like-for-like sales growth of 10.3% and internal selling inflation of 10.1%. Hardly surprising, then, that Shoprite shares are up almost 10% year to date while Pick n Pay stock has crumpled, losing 29%.
Pick n Pay’s trading update provides no details on the breakdown between corporate stores and franchise stores. During financial 2023 franchise stores traded significantly better than corporates, which, Vianello says, was another indication of the funding challenges at head office.
The good news, according to management, is that on an underlying earnings basis — that is, excluding net incremental energy costs, one-off supply chain duplication costs, and restructuring costs — “the group does not anticipate a loss for the period”. So, essentially if Pick n Pay operated in an ideal frictionless environment, things would be OK, and shareholders wouldn’t be facing a first-half loss.
But as Ackerman pointed out, this is far from the situation the group is dealing with now, or will have to deal with in the foreseeable future.
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