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Why the fury over store accounts? Pick n Pay boss asks

The retailer has come under fire for offering customers a store account to buy groceries and other goods on credit.
Pick n Pay CEO Richard Brasher assures the retailer will be a responsible credit provider. Picture: Supplied

“I have no moral upside in getting people into debt. When people suggest that this is our motivation, I find it slightly offensive.”

Pick n Pay’s CEO Richard Brasher is astonished by the outrage over the retail group’s decision to allow qualifying customers the option to purchase groceries on credit. “We have no intention of encouraging people to buy their goods on credit if they cannot afford it,” said Brasher, the former CEO of UK retail giant Tesco and who was recruited in 2012 to turn Pick n Pay’s fortunes around.

But Brasher’s defense of the retailer’s new store account is not flying with debt counsellors and specialists.

Consumers are already saddled with a heap of debt and market watchers have argued that if consumers are purchasing food on credit, they are likely experiencing financial strife and should not qualify for more credit.

Although the household debt-to-disposable income ratio has been steadily declining from highs of 87.8% in the first quarter of 2008 to 73.2% for the first quarter of 2017, the ratio is still at uncomfortable levels.

Pick n Pay is pulling out all the stops to attract credit customers; offering interest-free credit if they settle their account in full within 55 days and a monthly store account fee of R10. There are no hidden fees (administration or joining) charged.

When a customer fails to pay their debt within the 55-day grace period, a maximum interest rate of 20.75% kicks in, which is prescribed by the National Credit Act (NCA). If a budget option is selected – meaning customers pay their debt over a period of 24-36 months for big ticket items (costing R600 and above) – then the interest rate is capped and cannot go higher than the maximum NCA interest rate.

The store account is accessed through Pick n Pay’s Smart Shopper loyalty programme, which has more than seven million active users.

Brasher said the retailer’s credit terms are more affordable than other offerings in the market. “I want to encourage our shoppers to take up 55 days’ worth of credit and pay it back. We do believe that we can give customers access to some floating money during the course of the months when times are tough,” he said on Tuesday after the release of the company’s interim results.

“We think it [the store account] will be a good thing and sadly it was misreported and people didn’t believe our intentions.”

Pick n Pay is targeting middle-income consumers, who may not have a credit card but a debit card. They probably spend R800 to R1 000 per month on groceries and 50% of their goods are already bought by some form credit, whether it’s formal or informal, said Brasher.

The retailer will not earn income from the interest charged to consumers and there’s no profit-sharing arrangement with its partner RCS, a credit provider. RCS will be vetting the creditworthiness of shoppers, granting credit facilities and imposing interest fees on consumers defaulting on credit obligations.

“Let’s be honest, of all the companies in the country, customers would probably believe that we are doing this for all the right reasons rather than the desperate rush for a little trade,” he said. 

Pick n Pay is in the middle of a turnaround strategy that plans to return the retailer to its former glory after years of neglecting investments in stores and losing market share to high-flying Shoprite and Woolworths (which also offers credit facilities).

Read: Pick n Pay recovery gathers momentum

In what is a challenge to the high cost of bank charges in SA, the retailer has also launched a money transfer product in partnership with TymeDigital, which was recently awarded a full banking licence. It has 200 000 customers using this product at its Pick n Pay and Boxer stores.

Gareth Ackerman, Pick n Pay’s chairman, said the interchange fee charged by the banks when its customers use their credit and debit cards to purchase groceries remained at “unjustifiably” high levels. The retailer pays the customer’s bank for their every transaction. “Despite an undertaking by the banks to revisit these charges, they remain excessive at 1.48% for credit card transactions and 0.44% for debit cards,” he said at the company’s results presentation.

Ackerman said bank charges in SA were in some cases more than double that of the European benchmarks. “Retailers should not have to pay for bank’s credit risks, bad debt, and other costs.”

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You are a food retailer not a bank. When the accounts get written off the goods on the shelf will pay that, ie the cash customer.

“The retailer will not earn income from the interest charged to consumers and there’s no profit-sharing arrangement with its partner RCS, a credit provider. RCS will be vetting the creditworthiness of shoppers, granting credit facilities and impose interest fees on consumers defaulting on credit obligations.”

Isn’t RCS carrying all the risk? From the above it seems so. And thus if people default it will be RCS that suffers and RCS don’t control the price of stuff on the shelves…

Sweet deal for RCS, getting to lend to PnP’s customer base, with no profit sharing (no other fees?); and presumably access to their data in order to target certain clients.

It’s a similar business model to Synchrony Financial, in the US, which Warren Buffett’s Berkshire Hathaway recently bought shares in; and also bought by SA’s Anchor Capital in August.

Quite a clever move by the 55 year old CEO before he retires in the next five years or so. Credit sales will boost profit figures in the short term, resulting in out of the ordinary performance bonuses and incentive schemes for those at the top. Until bad debt ruins it all in the longer term. But that can be left for the replacement CEO to address. Let’s enjoy the ride!

I can see why everyone is frustrated with Pick n Pay, but its clear that the people complaining are not thinking this threw. Pick n Pay allows a credit application, leaving the choice completely up to the customer to choose if they want to apply or not. They also have a strict approval system, so that people are not dropped into debt if they can’t afford it. People are already using credit cards, overdraft facilities and personal loans for their groceries (do some research to see the interest on these two). Other people also resulted into buying groceries on account at other companies that offer groceries at more expensive prices, also with high interest rates (these companies offers clothing and groceries – and I will not mention names). People is already in a tight squeeze and are looking at ways to get out of debt. With Pick n Pay offer short term interest free and long term low interest credit on groceries, was an outstanding decision. Everyone needs to understand that not everyone want to take money from others to pocket themselves. The credit that Pick n Pay offers can not only assist people from getting out of high interest loans and credit, but also helps people to get groceries if their salary is paid in a little late. So think before you attack Pick n Pay, because when your salary is paid n week late and you don’t have spare money, you might end up real hungry and the interest free short term credit from Pick n Pay could be an option for you. I am only 25 years and I can see this just by thinking a little further.

Me thinks I smell a rat, most people use plastic credit in encase . That credit cost the people money. Who is doing the notching,I think those who will not be making that money.

Me thinks I see bad grammar. I am a 25 year old accountant that see the effect of debt on a daily basis. I assess this from an accountant (financial) point of view, and therefore rate it as an outstanding choice by the CEO. The CEO doesn’t benefit nearly as much as the people struggling with high interest methods to buy groceries. My predictions are, that within time, more groceries retailers will follow Pick n Pay when the dust settles.

@ForstIce38, firstly, check your grammar in your post above this one, “People is already in a tight squeeze” …. as they say first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye.

On to the discussion at hand, the customer LSM which Pick & Pay is targeting will probably not use the services of an accountant to perform their taxes etc, they are probably standing in line at SARS annually submitting a return without having to pay any tax, so I am not sure how you see it first hand everyday, you are probably working with middle to upper class clients.

The only thing Pick & Pay will be successful at will be to build up a nice customer balance on the balance sheet which is probably not likely to be recovered and boost up sales due to this until the bad debt starts kicking in.

Pick & Pay should rather start subsidizing basic foods to enable customers to buy more food with less cash.

barryheyns – Thanks a lot for the comment, but the fact is as accountants we do poor peoples tax as well. Various poor people are sole proprietors trying to make some sort of profit trading by themselves from their personal bank account. Sole proprietors need financial statements before they can go to the SARS branch to submit their income tax return. We also work with companies with a lot of various credit financing, and therefore I see the applicable interest rates and effects of these interest rates on a daily basis. I also see losses due to finance charges (which is credit interest), also companies closing due to this. So yeah I experience the hole variety of effect on ALL different income classes. I can see you have a misconception of our job profession and our clients. We don’t only deal with middle and upper class clients. We also assist the poor to correct returns that was incorrectly assessed. Oh and its a customer base not a customer balance, a currency is measured in balances.

@FrostIce38, I completed articles etc and have been working in financial services for 15 years. I have no misconception of your job, I probably have 3 x your experience in doing it. Most of the people applying for credit to buy food won’t be able to pay your accounting firm R500 – R1000 to file tax returns for them. As I mentioned they would be the people lining up at SARS every year to get help filing their returns directly at SARS for free. They probably also don’t earn enough to even need to pay tax. I have not seen the criteria to be able to apply for the credit which PnP is offering, that would be really interesting info as it would identify the customers they are trying to lure in and also the ability to recover the debt. I specifically used the words customer balance as that is what will be reflected on the statement of financial position, not a list of names or customer base.

barryheyns – I am unaware of the type of accounting firm you are employed at or part of. I am also unaware of the location of the accounting firm that you work for. But as I mentioned we have poor clients, and I also want to stipulate that I mentioned that I see the effects of the high interest rates on a daily rate. Our charges are also not R 500.00 as a minimum, but even lower for various clients. I also want to recall that I stipulated numerous times, that numerous of the articles regarding the PnP credit, stipulates that the credit criteria is strict and no credit has been given to any poor person at all. I don’t know where you completed your articles or if you are an accountant, as you only stipulated the completion of articles not that you are a registered accountant. Even though I have little experience in years, you will be amazed to see what I saw at the firms that I worked at, the registered accountants I took on, and clients I handled. I assist other accountants that practised for years with various queries even though I have 5 years experience. I don’t know what you learned in your articles as old firms believed that clerks must only process, times became harder, inflation and interest rates increased, etc. As I mentioned I don’t know what your experience in accounting is, I only want to mention that I experience these situations and rates on a daily basis. In fact I have a new client now that I need to assist with the same situations as mentioned in all my posts. But I feel that you are going of the topic of PnP’s credit.

“But I feel that you are going of the topic of PnP’s credit.”

You probably mean “off”

Completed SAICA articles at a small to medium size firm, audited 50% of the time the rest was spent on individual/company/trust tax calcs, monthly processing, financials all the stuff you get exposed to at a smaller firm.

If the criteria are as strict as you mention, the people qualifying would probably not need debt to pay for food, by utilizing the rewards schemes available you can actually save more by using your banks credit facility versus the saving in interest rate at PnP. Look at FNB and ebucks for example, you get 15% back in ebucks by shopping at Shoprite/Checkers.

PnP also mostly caters for low – medium LSM customers, which would probably not be your best candidates to pass strict qualifying criteria.

Anyway, time will tell. I only responded due to this comment you made in the first post which annoyed me “Me thinks I see bad grammar.”, especially from someone who clearly has their own grammar issues to resolve.

cheerio mate!

Its funny that you mention that you completed articles, this means your not a registered charter accountant (otherwise you would have stipulated that your registered). By the way most charter accountants doesn’t understand accounting work as they only evaluate it whereas accountants do the work. Various CA’s don’t know how to get to the TB or the AFS because they only sign these based on a verification of supporting docs. You can’t comment if you don’t see this in process to a TB. You don’t see the “In between”, only the final product. So as someone who only completed their SAICA +/-15 years ago, and didn’t even complete registration as a CA. Your data for argumentation is outdated by far.

Otees man. If you understand. And you try to correct my 2 minor grammar errors. Clearly your English needs correction. You said something regarding a plank in your eye earlier…

Enjoy the rest of your day.

Those of us with some knowledge of lending to the poor have heard all the reasons given by the CEO/RCS before. Fact is, this will harm the poor and in the end it will harm Pick n Pay. Unfortunately, they will gain market share in the short term and this may “force” competitors to follow suit to hold share. The CEO and his team want to make bonuses and grow share, that’s it. They are clever people and those who have lived in SA should by now know that the poor find themselves in desperate situations every month and will be tempted to borrow for their groceries. It is not sustainable for those with uncertain income and marginal cash flow each month to borrow for consumables (edibles). Disgusting in my view. I will boycott PnP if they do this.

I swipe for groceries at Woolies. Do you boycott Woolies?

What irritates me about the comments on this article is that most comments suggests that PnP should not do it because it will “harm” people, which is a massive generalization. When suggesting something should not be done based on a generalization, you basically suggest lets regulate the market so that institutions like PnP can’t “hurt” people. Once you have government playing the role as “dad” to watch over their kids “the sufferers” not taking on too much debt, we got a much larger societal problem. What happened to teaching your kids to take responsibility for action themselves? Nobody is forcing anyone to take on debt to buy their food from PnP, even by credit card. Now suddenly PnP should decide what are “good” for everyone.. c’mon. If you want to regulate something, because society is already doomed, my suggestion is that you tighten the access to credit, but not eliminating the access to credit.

Even clothes accounts for the poor are more likely to be productive, and I’ll bet nobody earning under R5,000 a month (people who can’t get a credit card) with a clothing account has ever had a good thing to say about their experience borrowing to fund their clothes. Clothes last a few years and can be used to do productive things (like attend work looking professional), food is gone by the end of the month while the debt remains. (See the SA cases of Edcon and other retailers growing market share by offering credit).

Indirectly food leads to productive things (like surviving to be able to go to work, and focus, and energy, and hydration). Clothes last for years, yet you can’t last (survive) 3 days without food. Therefore food is a bigger necessity than clothes. Pick n Pay also does not give credit to the poor as stipulated in all the relating articles of the Pick n Pay credit.

OK, he does take it too far when he say that PnP won’t profit from the interest charged, but for the rest I can also not see what the big deal is. How much food isn’t bought via ordinary credit cards in any case at all retailers? Should all POS devices at food retailers now be disabled from accepting credit cards or debit cards in overdraft? I think this is simply banks being unhappy that they will loose out on these transactions.

They are targeting people who are not credit-worthy for a normal credit card (ie are a high risk of not paying back the money they owe). The only way to make money from people who are not likely to pay back what they owe is (a) not lend to them, or (b) charge lots of interest etc to makeup for the people who don’t pay. Neither really makes money in SA today, and (b) leads to lots of poor people in debt.

The only winner is PnP (read “management”) who sell more of their goods and grow market share and are able to better leverage economies of scale. In the long term PnP may also suffer from longer-term reputational damage, but maybe not.

Every article regarding Pick n Pay’s decision regarding the credit, stipulates clearly that there is an application system in place, and that more than 80% of the applications was unsuccessful because the applying customer wont be able to pay. These applications were denied to poor people, whereas the banks authorise the credit cards and overdraft facilities to the poor people, and the poor people use these credit cards and overdraft facilities for groceries. I don’t know where everyone gets the information that Pick n Pay gives credit to the poor. In fact the banks note that you have no money at the end of the month, yet they phone you to offer you an overdraft facility at interest rates of over 20%, but no one takes the banks on. Once again these overdraft facilities are used for groceries. So the overdraft facilities and credit cards are directly linked to groceries.

Pin – I think you are over reacting – see it as proprietary store card with no downside to PnP. RCS will set the qualifying criteria to gain a card, and will be responsible if the card balance goes pear shaped. PnP will more than likely question RCS on the interest recovery rate, if they charge ridiculous rates. One thing is not clear in the article is what happens when the debt is irrecoverable – the way I see it RCS would carry the write-off as they set the criteria for the issue of the card. To my mind this is merely a clever way for PnP to move bad debts out of their books to a third party – so in essence there is no need on PnP’s side to bump up prices as they no longer need to factor in bad debts, which they can only recover through price hikes
So in my estimation its a shrewd move as it is externalizing bad debts

Thanks grahamcr, perhaps I am overreacting. I still don’t like it a bit but I admit that this is an emotional topic for me. Dead against it personally, but clearly there is a variety of perspectives.

The borrower is slave to the lender. PnP is predating on the poor and turning them into slaves for its own benefit.

Nonsense – RCS is providing the card limits and vetting the individuals, and they set the interest rate on the outstanding funds, and they are the collecting agents not PnP. PnP pick up no bad debts on these card holders which is not the same as other store credit cards

We all know you used to work for a bank.

As stated, Woolworths offers credit already, in fact they have a much more extensive offering to customers earning as little as R2000 per month. If these customers are forced to use credit to survive the month, their borrowings can probably go further at PnP. Bring it on, I say.

How is buying stuff on credit going to make them survive for longer? Next month the problem only gets bigger because them will have the added debt as well.

Yet so many people already has credit and PnP offers to assist them with lower interest rates and even interest free, but not many people sees this as they are to busy insulting PnP. I am pleased to know that you have no credit card, overdraft facilities, personal loans, loans at your employer or a company, no motor vehicle financing, no mortgage loans, no debt. Some of us are not that fortunate to get everything, but we have to work for cash and obtain some items on credit as it is mandatory for our jobs. Glad to know you can afford a car and a house cash from 19 years old.

Exactly what I am trying to say, but everyone gets stuck at the poor people that PnP doesn’t even allow to get credit.

Credit makes people poorer. Wake up!

Of course the credit has to be managed responsibly. I’m not saying that it’s sustainable to have greater expenses than income in perpetuity and fund it on credit, but monthly income and expenses do fluctuate, and this counts for poorer and slightly wealthier people. The 55 days of interest-free credit today could just help tide someone over until his Christmas bonus or commission comes through.
I do believe in the potential to offer improvements over the existing alternatives, whether it’s for cheaper food than from an LSM_8-10 store, or avoiding bank charges that add up each time you swipe or withdraw cash, or avoiding overpriced appliances from furniture retailers, avoiding the month-end shopping rush, or enabling bulk purchases when items are on special. PnP has such a wide range of goods that it’s almost worthwhile just to reduce the number of accounts you keep.

Personally I dont see what the fuss is about. If offering credit could mean the difference between feeding your family and not feeding your family, where is the harm? Everyone has tight months… they should rather end the policy of selling clothing on credit. Food is essential, new Levi’s are not.

If you think your months are tight without a credit card, try having a tight month combined with a credit card bill.

PnP will be a good stock to short in 2019. Trying to make my people poorer huh, I’ll show you.

What’s the fury? We buy food at Woolworths on credit. Makro has a store credit card, partnering with RCS, and it’s okay. Why the fury when PnP follows suit?

You are correct. And PnP’s are lower. But everyone’s arguments are regarding the poor people that doesn’t even get the credit.

Messrs Brasher/Ackerman,you & your top execs won’t have to deal with this scenario personally – phew.But your stressed tellers most definitely will, and in front of many customers.Bear with me. PNP ‘credit’ customer runs into debt, but is so desperate for food for her children, that she makes an emotional scene in one of your stores.Now imagine this playing out thousands of times,monthly,at your stores,nationwide? Good for reputation, huh?!

End of comments.

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