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Margin squeeze hits Pick n Pay; Africa a bright spot: Richard Brasher – CEO, Pick n Pay

Can Pick n Pay develop quickly enough to match rivals’ space growth rates?

HILTON TARRANT: Pick n Pay, South Africa’s second-largest supermarket retailer today reported turnover growth of 7% for 2012, but it’s close to 6% if you compare year-on-year numbers, not 52-week numbers. Headline earnings per share from continuing operations are 31% lower. The dividend is down by 36%. The retailer has had a tough few years as it moved to a model with centralised distribution and centralised category buying.
   New chief executive Richard Brasher, who joined the group from British retail giant Tesco, has been in the corner office for just on 62 working days. Richard, in getting to grips with the business over the past three months what have you found?

RICHARD BASHER: Well, I found a good business. Obviously it’s a disappointing result for our shareholders today, but that is how Pick n Pay is and still can be a great business. And the thing that’s pleasing in the difficult seas that we face is the fact that we have increased customer numbers, we have got more people in our shops, we have opened more shops and we have taken more money. Our problem has been that we have not managed to convert that into appropriate profit figures for our shareholders.

HILTON TARRANT: Richard, you’ve only been in the job for three months, and you spoke this morning about still continuing your investigation into the business until October. Are we likely to see a radical overhaul, a departure of what the company’s been executing on?

RICHARD BASHER: It’s difficult to tell, Hilton. I don’t think it’ll be radical, to be honest. I’m going to focus on the basics of the shopping trip – that’s what customers want to see. The changes that Pick n Pay have been through with the centralisation of their buying, the changes in the supply chain, and the infrastructure in IT, are really not something that customers see an immediate benefit from. So I want to focus my time in the stores. What customers want is fresher products, cleaner prices, making sure our staff give great service and making sure we stay in stock. And probably enough of strategy for the time being in Pick n Pay and little bit more back to the basics of retailing.

HILTON TARRANT: It is a tough trading environment out there and no doubt exacerbated by the strike action we’ve seen over the past 12 or so months. Higher costs in the business and one-offs related to that centralisation. We’ve had electricity and rates increases. South Africans are well aware of those. And another increase in costs, which has come from almost nowhere – a big shift to credit-card spending which means you now carry those transaction costs. Is that a significant jump?

RICHARD BASHER: Well, I think it clearly is a barometer of the fact that the customers are feeling the pinch. And therefore if you start using more credit cards in the stores it’s a reflection of people reaching out for the credit. I think what we have to ensure in Pick n Pay is that at times like this they need the business to be…providing better value for money and making sure we are there for people when they need it.
   Everything’s relative in life, Hilton,. I still think 1% or 2% growth in the marketplace is good compared to Europe, and you get to be here in the sunshine as well, which is even better.

HILTON TARRANT: That trading margin in the business of 1.4% for 2012 – where would you be more comfortable for that number to be?

RICHARD BASHER: Well, clearly higher. The business has delivered a good margin in the past and I’m confident that we can get it back to deliver a good margin in the future. Inevitably when you go to the level of stock change that Pick n Pay has been through, then that is an investment phase. I think some of the heavy lifting is behind us and we need to make sure now that our margins start going up rather than going down.

HILTON TARRANT: Some bright spots in the numbers, Richard. Your Smart Shopper loyalty programme still growing significantly – 6.3m card holders, 10 smart shopper cards swiped every second that your stores are trading, and now I guess it’s just a case of getting that programme more efficient.

RICHARD BASHER: Yeah, there’s a lot to like in it, and there is plenty of opportunity for improvement. I’m a 20-year veteran in loyalty schemes and I’m delighted that Pick n Pay is saying thank you to their customers for shopping with us. And our customers…truly identify with us being of benefit to them. So we need to make it more accessible to customers. They don’t all like the kiosk, so we need to do more work to make it easier for them. But that is how people like having the cards and they like the benefit it’s giving them.

HILTON TARRANT: Have you been spending a lot of your time in the job to date meeting with customers?

RICHARD BASHER: I have spent many hours with our customers and quite a few of the days that you just mentioned in our stores, which I always find is the best way to understand the business. The great thing about the Pick n Pay brand is it’s held with a degree of emotion, both positive and negative. So I’ve had a lot of feedback from customers. There are things to be pleased about that we should build on, and feedback – I’ve had a fair amount of it. And there are areas that we can definitely improve upon.
   The good news is they are still shopping in our stores and our customer share is up year on year and I’m looking forward to ensuring that they spend even more time in our stores.

HILTON TARRANT: One of the other bright spots in the numbers – Africa, the margins there three times the South African margin, and growing. There’s a one percentage point increase in the margin in Africa between 2011 and 2012. Will you continue to focus on the opportunity on the continent?

RICHARD BASHER: Yeah. We’ve segmented it for the first time, so people can see our African division. It’s clearly a fledgling business, R3bn turnover, R100m profit, and over 100 stores. So it’s growing by 35%. I’ve got a good team running it. It’s very important that it’s seen as a fledgling strategy rather than the second engine in growth in the short term. But our focus is predominantly on the domestic market in South Africa, where our core business is. I’m very pleased that Dallas Langman, who heads up our Africa division will be taking that…forward in the coming year.

HILTON TARRANT: Just looking ahead, you are set to open more than 100 stores in this financial year. Playing a bit of catch-up there, given that your competitors have been growing far more aggressively in the recent past.

RICHARD BASHER: Ja, there’s clearly been a little bit of territory-gaining going on over the last five years and Pick n Pay hasn’t really taken part, and that has been one of the main reasons that some of our competitors have made the progress they have. So if there’s a race on we need to be part of it. It’s not a blind race. We need to make sure we open stores where customers want us and where we can make a return for our shareholders. I’m confident there are many places where Pick n Pays aren’t, but I’m sure if we can enter those communities they will benefit from our brand and our offer.

HILTON TARRANT: Our thanks to Richard Brasher.
   David, listing to e Webcast, the results webcast earlier today, lots of fascinating insights as to where Pick n Pay is as a business right now. Interestingly, if you look at the recent past, Richard pointed out that in terms of space growth, store growth, Shoprite Checkers has grown its space by 60%, Woolworths by 50% and Pick n Pay by 15%. So that gives you some indication of why they are lagging.

DAVID SHAPIRO: Just listening to him – although David Kneale wasn’t as open as Richard is – one gets the same kind of impression. David turned Clicks around, and fairly soon. It took him a couple of years and look at Clicks today. All the stores have been kind of refurbished…

HILTON TARRANT: All the pharmacies.

DAVID SHAPIRO: Not only pharmacies, but restructured and so on. And I have no doubt that Pick n Pay in a few years’ time will be a different company from what it is today. But I think, Hilton, the problem is can you wait in terms of results?

HILTON TARRANT: What’s interesting is we have now got David Kneale running Clicks, we’ve got Richard Brasher running Pick n Pay, both from the UK, We’ve got Ian Mohr running Woolworths – he was in Australia, a Scotsman.

DAVID SHAPIRO: Ja. Generally our retailers are very well received. Maybe the grocers need a pick-up. On the apparel side Mr Price, Truworths and Foschini have done incredibly well.

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