Shrinking Pick n Pay still on the margin

The Pick n Pay store in Hyde Park Corner shopping centre has been a stalwart in one of Joburg’s most affluent areas for decades. But its performance has been lacklustre for years it and will close later this year. Checkers is in discussions to take over that store.

It’s a sign of the times. Where Checkers continues to pop up with new outlets in its aggressive expansion, Pick n Pay is to close a tenth of its corporate supermarket base over the next two years. A further 70 stores or so will be converted to the mass-market Boxer brand or to franchises.

And with the first phase of the recapitalisation programme successfully sorted, all eyes are on the group’s performance. Pick n Pay’s trading update last week shows signs of improvement in some aspects, but its core supermarket business is set to report a wider loss in its half-year than a year ago. It continues its “multiyear journey” to return the rump of its business to profitability.

The retailer posted its first-ever loss in its year to end-February, with net debt of just more than R6bn on the back of prolonged weakness in its supermarkets.

The update shows that the country’s third-largest retailer has sacrificed margin to be aggressive on price to try to win back shoppers — or at least stop them from leaving. 

Boxer and Pick n Pay Clothing continue to deliver strong performances, and grew market share. Boxer grew 13.5% overall and 9.52% on a like-for-like basis, driven by strong like-for-like performance complemented by new store openings. Standalone clothing stores grew 10.3%, but only 0.7% on a like-for-like basis. 

Company-owned supermarkets in South Africa, which account for most sales, significantly underperformed in recent years. But for the first time in a long while, they outperformed franchise supermarkets (which delivered a “disappointing” drop of 0.8% in the 21 weeks ended July 21).

Damon Buss, equity analyst at M&G Investments Southern Africa, says the two growth engines are continuing to perform well, with Boxer delivering good volume growth and Pick n Pay Clothing still expanding its store base.

“It does look like there has been some price investment during this period. Pick n Pay has struggled, with consumers perceiving it as more expensive than its peers. And it needs to incentivise consumers to come back and test its offering again, which, in a weak consumer environment, requires better value.”

Buss contends it’s a necessary strategy to stem the market share losses the Pick n Pay brand has experienced over the past few years. “However, it comes at a further cost to shareholder returns in the short term.”

He points out that the continued negative volume growth in the Pick n Pay brand stores indicates they’re still going backwards, though at a slower rate. “It is concerning that the like-for-like growth from the Pick n Pay franchisees was so weak. Pick n Pay does not need any of its franchisees defecting to its competitors’ franchisee offerings.”

Significantly, Pick n Pay is looking to implement a new franchise model by the middle of next year, covering issues such as rebates to franchisees. Clearly, revitalising the performance of the franchise stores is now a priority for the group.

Alec Abraham, senior equity analyst at Sasfin, says what’s clear from the latest update is that management is pulling out all the stops in a desperate attempt to win back customers.

But Abraham is sceptical that this will enable the group to regain market share, and thinks it could maybe prevent further losses at best. “I don’t see the price competitiveness gap to peers narrowing materially.”

Abraham notes that Pick n Pay’s average basket selling price declined by 2.6 percentage points (pp) in the period compared with financial 2024. This is lower than the estimated 4.1pp drop in the general dealer segment average, according to Stats SA data. “So, peers [such as Shoprite] with deeper pockets to fund promotions because of more efficient distribution and scale rebates may be doing more to retain and gain more share.”