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Pick n Pay becomes ‘leaner and fitter’

Reducing the base cost of 2 500 products to focus on everyday purchases helped drive H1 trading, says CEO Richard Brasher.

NOMPU SIZIBA: Supermarket chain Pick n Pay came out with their interim results today for the 26 weeks ended August 27. They reported group turnover up 6.4% at R41.2 billion, and like-for-like store turnover up 3.8%. While their gross profit margin remained steady at 18.6%, headline earnings per share were up 17% at 100.18 cents, with the company also raising the interim dividend by the same margin, at 39.1 cents. Their rest-of-Africa operations did not perform as well, though.

To tell us what’s behind the numbers, I am joined on the line by Richard Brasher, the CEO of Pick n Pay. Richard, there was a positive response on the share price following the release of your results this morning, with shareholders getting a cool 39 cents per share dividend. What do you attribute to the latest performance?

RICHARD BRASHER: Well, I think it’s actions that we probably took the best part of 18 months ago. We could see that there were clouds developing on the horizon with the economy, and therefore took decisive action to reduce our costs, and become leaner and fitter. And then, as we came into Christmas last year, we invested much of that money into helping our customers get better value in our stores – and we’ve continued that in the first half of this year. I think in that climate people have really appreciated having a little helping hand when things become quite difficult.

NOMPU SIZIBA: You indicate that your internal inflation rate averaged 0.3% against CPI food inflation of 3.5%. What is it that you do to keep your internal metric down?

RICHARD BRASHER: I think there’s been an increase in promotions – not necessarily in number, but in quality. And I think people have sought to cherry-pick a bit, so that’s helped them get better value.

There has been some natural deflation in some of the commodity markets. The maize price has been more depressed after some of the hikes following the poor harvest two years ago. So these are all dynamics that happened within it.

But what we tried to do is reduce the base cost of 2 500 products and focus our attention on the things that people use and buy every day. And I think that both of those things, and especially on basics of life, whether it be protein and meat or whether it be food and vegetables, all of those things have helped to drive our trading in the first six [months].

NOMPU SIZIBA: Last year you worked hard on cutting your costs down and that included cutting staff. So, from a cost-management point of view, what have you been working hard on this year? I see you have managed to substantially reduce your electricity usage – broadly – and water [consumption], particularly in the Western Cape.

More new-store openings

RICHARD BRASHER: Yes, we are always keen to reduce the costs where there is no direct impact on people’s roles and jobs. I would say that any of the cuts that we made in the past year were voluntary rather than compulsory, and we found a good way of, as a group, employing more people. I know it seems slightly ironic that we lose some staff but we also employ some more, but that’s because we opened 60 stores in the first half, and we open another 70 in the second half.

So the key is to be productive in all of our operations, and if you take something like our central distribution, where we now distribute nearly 80% of our goods on fresh and ambient, that gives us an efficiency which allows us to plough that back into lower prices.

And then, finally, if we manage our cash properly, and we manage our stocks carefully, we end up with an improvement in either interest payable or not paying interest to banks. Again, no one really gets hurt in that process, and that’s why we are very focused on areas like that.

NOMPU SIZIBA: So you’ve grown your own brand offering quite substantially. Presumably you are getting the necessary traction from demand. How competitively priced are your own brand products compared to your more well-known household brands?

RICHARD BRASHER: Obviously our own brands are brands in their own right, but they need to be good quality and they need to be more competitively priced. So we love brands, and that’s great for the big companies, and so do our customers. But I think our own brands are important, where we can deliver better value on occasion, because we are in control of the operation, and because we don’t end up having the overheads and the marketing that some of the big brands have.

We are up to 21% participation, and that’s grown by 5% or 6% since I’ve been here, and I still see it as a big opportunity. But I think it’s both [other] brands and our brands in unison, rather than it’s us and not them.

NOMPU SIZIBA: I hear you. You’ve grown your presence in offering financial services. You now offer a credit card with the Smart Shopper card. Just remind us of when that scheme actually started, and how much the business has grown since it started. I see you have further plans to do more in financial services with your finance partner, Time Digital. Just tell us about that as well.

Interest-free credit for customers

RICHARD BRASHER: Yes. Services are important to us. They are not so much seen as a massive profit generator, but they do allow us to sell things for less because we have them. We want more reasons for people to shop at Pick n Pay, by enabling things like money transfer or people just withdrawing money through our tills, using their cards. We gave people the offer of a store card about nine months ago, and we are now up to over 100 000 members. That gives people affordable short-term credit, with an incentive to pay it off rather than necessarily go into debt. We are very careful about the way we offer that. But we’ve got a large number of people finding that that’s a more efficient way of them planning their finances, and they get over a month’s worth of interest-free credit.

That’s the way we are going. We don’t take the credit risk and we don’t make any money from credit. We only make money if people shop in our stores. That’s really the approach that we are taking with many of our services. It’s another reason to come to Pick n Pay. If we end up with a benefit financially we’ll share it with our customers, and we do it with partners – as you say, Time Digital or RCS or a number of other service providers.

NOMPU SIZIBA: The general feeling about the local economy is that things are tough and the consumer is under pressure, yet you guys, like you said earlier, managed to open 60 new stores in the period under review. You also closed a few stores. It’s interesting that there is still room for growth in terms of opening new stores. In that process how many jobs were created?

RICHARD BRASHER: I think from memory we created another 1 500 jobs. So that’s a good feather in the cap for the team. We are careful. I think about 2% of our business came from new store openings. I know sometimes in the past it has been as high as 4% or 5%, and for some of our competitors even higher. But we want to pick our sites very carefully. It’s not the Klondike Gold Rush – we just have to pick the right sites.

But I think there are still many years of an opportunity for Pick n Pay to expand across South Africa. We feel that we’ve got a brand where everyone is welcome, whether it’s in our Pick n Pay store or in that of our sister company, Boxer. We are very excited. Okay, the economy is tough and if it gets better that will be the wind at our back. But, despite the challenging environment, there is an opportunity for us to do well in South Africa.

NOMPU SIZIBA: You’ll correct me if I’m wrong, if my assertion is not correct, but your rest-of-Africa operations didn’t perform as well as the local economy, and the exchange rate appears to have contributed to that. How would you characterise the markets you are operating in, in the rest of Africa, and particularly in Zimbabwe. What’s happening there in terms of food inflation, sourcing food? And are your TM stores there also experiencing empty shelves?

RICHARD BRASHER: I was pleased with our rest-of-Africa [operations]. The rest of Africa is the rest of our life, so it’s not a game that you have to be in a hurry to expand rapidly. I think we’ve had a very measured approach, and we’ve got a good business. It’s profitable. It grew – maybe not by as much as other areas in our business – and the team on the ground have done a good job. Now one economy is poor and another economy might be better.

Surprisingly in Zimbabwe we issued a very good result with our partner, Meikles. It’s a difficult economy, as you rightly point out. There has been a little bit of scaremongering about availability of stock, and some government announcements were a little surprising for customers. That results in them shopping a bit harder. But we didn’t run out of stock, and we didn’t put our prices up either, because that’s the way we play. So I think we won a lot of friends in the past week in Zimbabwe, and we hope that the new regime, the new government, will come up with measures to stimulate employment and growth in the economy.

But in the meantime we can only win on the pitch that we play on, and I think the guys are doing a really good job. I’m hoping that inflation has ticked up, but it’s certainly not hyperinflation. Availability is not easy to achieve, but we, I think, are doing a good job in a difficult circumstance.

NOMPU SIZIBA: Okay, Richard. Thank you so much for your time and insight.

Read: The Pick n Pay ship is slowly turning around

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