Boxer must pick Pick n Pay up off the canvas

Newly listed retailer Boxer needs to keep punching above its weight to keep parent company Pick n Pay off the ropes.

Pick n Pay has needed a capital infusion of R14bn, from a recent rights issue and Boxer’s successful IPO, to pick itself up off the canvas. The reinforced balance sheet will hopefully be able to sustain a rapid recovery after the group incurred losses and shed market share at its eponymous supermarket business.

Fortunately, Boxer looks as lean and mean as Brian Mitchell or the late, great Dingaan Thobela in their prime. Instead of planning a flashy celebratory dinner on the evening of the listing this week, the Boxer executives chose to have a small cocktail gathering, then head to stores early the next day. It speaks to the no-frills philosophy of the Boxer leaders who, over the past year, have needed to alter their collective mindset as they head into the public eye as a listed company.

The market, on the other hand, has no qualms about Boxer moving into the ring with the JSE retail heavyweights. On Monday the group confirmed its share offer with about 157-million shares issued, representing an aggregate amount of R8.5bn at a subscription price of R54 a share. This implies a market capitalisation of R24.7bn for Boxer. Pick n Pay, whose market value now stands at about R22bn, will hold 65.6% of Boxer’s total issued share capital. 

Back in 2002, an entrepreneurial Boxer was bought by Pick n Pay (for R185m) to improve access to rural and peri-urban areas. At the time the company had 35 stores and annual sales of R800m.

Boxer started with stores mainly in KwaZulu-Natal and the Eastern Cape in towns including Mtubatuba, Nquthu and Ulundi. Now it is in all the major CBDs and in many townships, with major expansion plans. 

But Pick n Pay would not be spinning off Boxer unless it had to do so. Where Pick n Pay is a far broader assortment store that focuses on the leading national brands, Boxer accesses the formal and informal grocery market. It sits somewhere between Usave and Shoprite and, as a “soft discounter”, is part of the fast-growing category serving the value segment.

It does not position itself as a wholesale or a “cash and carry”, though it contains elements of this format.

There is something almost poetic about the symmetry of the event. In 2002 Sean Summers, as Pick n Pay CEO, bought Boxer, when it was operating in a market that Pick n Pay did not understand and was unable to develop to any great degree. Summers is once again the Pick n Pay CEO. And current Boxer CEO Marek Masojada was part of the team that negotiated the sale of Boxer at the time.

Today annual turnover at Boxer Superstores is R37.4bn and trading profit for financial 2024 was R2.1bn. The store base is just over 300 supermarkets, 170 liquor stores and 30 Build stores.

Boxer has been left to its own devices since it was bought, which is just as well considering Pick n Pay’s recent travails.

Summers says it was a philosophy from the get-go when the group did the original Boxer acquisition. “I understood that Boxer had a distinct and very appropriate culture, not only for its company but for its marketplace.” It had the strength of Pick n Pay behind it, giving it some ammunition and capital to grow, and access to property and legal expertise. “That ended up being quite a turn-up for the books,” says Summers.

How does Boxer management feel about being thrust into the rigorous world of listed companies? Masojada says it’s been a learning experience. “We’ve quite enjoyed being below the radar. We’ve been sheltered by Pick n Pay over the past 20-odd years from many of these interactions … but for us we fully understand the reasons for it from the Pick n Pay side … we are looking at it from a positive aspect.

“We’ve always had the ambition to grow Boxer as a company and extend our footprint across South Africa. [The listing] will open doors for us. Maybe before we’ve been regarded as a bit of a minnow in retail, now we’re able to demonstrate the success and the strength of the model.”

The separation between Pick n Pay and Boxer is so clear that Masojada says Boxer “might even see Pick n Pay as a competitor in certain instances”.

He adds: “We’re a very different business, we’re a much more focused business, we focus on one particular segment of the market, we don’t have the complexity of having to service customers across the range. We’ve kept simplicity at our core along the journey.”

This is Masojada’s sixth year as CEO — he was CFO for 25 years before that. He joined Boxer in 1993 as a young chartered accountant in what was then Boxer Cash & Carry, a business of five supermarkets primarily in Empangeni with a modest head office. It had been owned by four trading families: the Goss family, the Rutherfoords, the Smiths and the Clarke family. The Goss family businesses in Lusikisiki and Mthatha were absorbed along the way. The founding shareholders had deep roots in rural towns. However, the stores are now spread across South Africa’s major cities and towns.

We focus on one particular segment of the market, we don’t have the complexity of having to service customers across the range

—  Marek Masojada

A defining moment was when Boxer’s brains trust went to Polish discounter Biedronka about 10 years ago, when there was enthusiasm for exploring other trading formats. The Boxer team came back to make significant changes to the business model — which was centred on simplicity and efficiency with a shift to functioning as a soft discounter. Boxer halved the range in the stores to 3,000 products. This means the stores have a curated, capped number of goods especially chosen for their appeal to the value segment. But unlike a hard discounter, there are butcheries and bakeries in the mix.

Boxer is firmly focused on the bottom end of the consumer range — LSM one to six. The prelisting statement notes that South Africa has barely tapped into the discount retail opportunity, and discounter penetration is significantly below that of peer emerging and developed markets.

Masojada tells the FM that the South African food retail market has an estimated size of R1.1-trillion. He says about R740bn of that can be described as the formal market and about R400bn as the informal sector.

Boxer has a strong emphasis on its own branded products (private-label and confined-label products), and these account for about 20% of total centre store sales.

There is significant participation in key categories (as high as 50% in some) with brands such as Golden Ray (named after Pick n Pay founder Raymond Ackerman), Shibobo and Best Cook.

Boxer will generally have one to three of its own-label products and one branded product (usually the category leader). Gross margin on private-label products can be 15%-20% higher than the single-digit margin on branded products. Sacrificing margin on some items drives foot count.

Expansion is on the cards. The plan is to launch 60 to 70 stores a year and in two formats, with about 60% of new openings being liquor stores and 40% supermarkets. The aim would be to open liquor stores in all supermarkets, but this would depend on location.

Boxer has about 68% of the discount grocery retail market and an estimated market share of 4.2% of the formal grocery market. That’s more than double that of Usave, which is estimated at 1.8%, according to the Futureworld “South African Discount Retail: Customer and Market Report”.

The informal grocery retail market is expected to grow to R494bn in 2027, at a 6.4% compound annual growth rate between 2023 and 2027.

Boxer’s turnover growth is expected to see mid-teens growth with mid-single-digit like-for like; it aims to double turnover within five years. Trading margin is about 5% and capital expenditure is set to be about 2.5% of turnover. There is a 40% payout ratio for dividends, with flexibility to reinvest in the business, fund growth and pay down debt.

The group has managed an enviable average 5.5% trading margin over the past three financial years.

Richard Cheesman, portfolio manager at Urquhart Partners, believes Boxer could eventually become the new golden child of food retail on the JSE.

He says market chatter suggests that within the first hour of the Boxer prelisting offer’s window opening, one institution had applied for the full R8bn allocation. At that point, the offer was already oversubscribed several times.

Damon Buss, senior equity analyst at M&G Investments, says listing Boxer separately will be positive. “The robust competitive offering, growth prospects from further store rollouts, low capital intensity and expected strong free cash flow generation should deliver good returns for shareholders over time.”

Buss says Pick n Pay’s planned controlling stake in Boxer provides the ability to adjust the dividend policy to send cash back to invest in Pick n Pay stores. But he notes: “This would either restrict Boxer’s ability to roll out more stores or force it to take on debt. Neither are as beneficial as allowing Boxer to use its cash to fund its own growth”.