Pick n Pay plans Africa expansion

Pick n Pay should use the proceeds from the sale of its struggling Australian operations to compete more effectively in South Africa and expand its footprint in the region, analysts said.

The company said this week it had accepted an "unsolicited" offer of A$215-million (R1.4-billion) for its 77 Franklins supermarkets and eight franchises in New South Wales from Metcash, Australia's largest grocery wholesaler.

The Australian-listed wholesaler was bought in 2005 from South African company Metcash Africa.

When Pick n Pay entered Australia, a notoriously difficult market for South African retailers, to diversify its geographical footprint in 2001, the expectation was that Franklins would be profitable in 12 to 24 months. However, the group only managed to earn its first operating profit in the 2009 financial year after investing about R1.42-billion in Franklins.

Exiting Australia was a "good move" and would allow Pick n Pay to invest the capital in South Africa at higher returns, said Danie Pretorius, retail analyst at RMB Morgan Stanley.

While the decision to sell was because it needed cash, "there is no shortage of capital projects in this company" where the money can be put to use, said Pick n Pay financial director Dennis Cope.

This year, R1.3-billion will be spent on opening new and refurbishing existing stores.

Pick n Pay's strategy to move to centralised distribution - an area where the company has lagged rivals Shoprite, Spar and Woolworths - will lead to investment of R2-billion over three years in new centres in Cape Town, Port Elizabeth and Durban. One centre is already operational in Gauteng.

Cope said the group would hold stock centrally rather than at individual shops. The system will "get rid of logistics and congestion at the back door", cut down on storage space at individual shops and ensure that "you're in stock of the right product at the right time and at the right price".

Storage and other non-trading space can take up 50% of a shop area, and rent must be paid for this area where no trade takes place.

The group will also be expanding to Mozambique, Mauritius and Angola on a franchise basis, with limited capital requirements, Cope said.

"A lot of other South African retailers, like Shoprite, have gone into the rest of Africa and have been very successful," said Imara ISP Reid analyst Garth Mackenzie. "It is not a bad idea for Pick n Pay to look at growing in Africa - there is still scope."

Shoprite has operations in 16 countries on the continent, while Pick n Pay has shops in Namibia, Botswana and Swaziland and has a 25% stake in TM Supermarkets in Zimbabwe.

Dollarisation of the Zimbabwean economy last year had made a "huge difference" to operations, and Pick n Pay would be "happy to increase our stake", said Cope.

He maintains the decision to invest in Australia in 2001 was the right one, though, with the benefit of hindsight, Pick n Pay "clearly would've been better off if we had simply left it (the money spent) in the bank".

"The business hardly made any profits in nine years, but this is a structural problem," said Pretorius. "Franklins' competitors are very big. You need scale to compete, and Franklins didn't have it."

Coles and Woolworths (unrelated to the South African chain), are Australia's market leaders with more than 2500 stores each.

This is Pick n Pay's second exit from Australia. The group departed in the late '80s, despite running a very successful hypermarket in Brisbane, when anti-apartheid construction unions refused to build new stores in Sydney and Melbourne.