SUNDAY TIMES - PnP growth slow but sure in tough market
Sunday Times Business By PALESA VUYOLWETHU TSHANDU, 2017-04-16 00:00:00.0

PnP growth slow but sure in tough market

A customer walks beneath the logo of South African supermarket operator Pick n Pay in Cape Town, South Africa, April 26 2016.

For a retailer on the road to recovery, treating old wounds in a low-growth environment has proved to be difficult.

But with an expected increase of 15%-20% in full-year earnings, Pick n Pay's turnaround strategy seems to be gaining traction, although industry pundits are wondering: is it enough?

This week Pick n Pay's trading update showed that basic earnings a share were expected to rise to between 251.98c and 262.93c, while the diluted basic earnings a share would rise to between 247.31c and 258.06c.

Investec analyst Unathi Loos said the recovery at Pick n Pay was going to be a mellowed one, but more sustainable.

"There will be no short cuts as there is no weak competition to undercut," she said.

Although Loos said the market consensus for Pick n Pay was looking for about 8% top-line growth in the last results, these came in at 7%, "which was slightly below expectations".

"I don't think that the recovery will be as exciting as what it could've been if it hadn't been for the strength of the competition. The growth that we saw in Shoprite in the early years was exactly because Pick n Pay was going through its weakest period," said Loos.

When the Pick n Pay group embarked on a turnaround strategy in 2013 under CEO Richard Brasher, the group's market capitalisation was R21.82-billion, making it the third-largest of four retailers at the time.

Today Pick n Pay remains the third-largest grocery retailer at R33-billion, trailing the Spar group's R34-billion.

A large part of Pick n Pay's recent success is due to greater operating efficiency, cost discipline, a more centralised supply chain and higher productivity in stores it introduced.

Loos said: "Given where they've come from, they've shown period after period of sustained growth, both in terms of top line and in terms of profit. It's coming from them doing basic retailing ... going back to basics.

"They've done a lot of work in terms of fixing their distribution centre.

There was a time when Pick n Pay had lower availability on shelf and that has improved," said Loos.

But Pick n Pay is operating in a world where its competitors are not standing back and letting them win its customers.

Walmart-owned Massmart, with its Game food offering and Woolworths's food division have made it tougher on the retailer.

Woolworths has invested in price, helping it win customers who are moving up the income curve from Pick n Pay, Loos said.

Pick n Pay's largest competitor, Shoprite, which has 32% share of the local grocery market, said that for a long time retailers had been looking for indicators of rising consumer confidence and a growing economy that would support overall consumption.

But Shoprite marketing director Neil Schreuder said: "The problem has been that for a number of years the support that is necessary for consumer confidence to be on the up and up has just not been there."

However, the investment by Shoprite's Checkers brand in its fresh-food offering has helped the retailer grow this category tenfold from when it started more than a year ago.

"Our sales growth and our market share are ahead of almost all of the retailers. Our customers are showing us that we are winning the war against the opposition," he said.

The latest data from Statistics South Africa shows that February's retail trade sales contracted 1.7% year on year from an earlier decline of 2.3% in January.

General dealers, food and beverage as well as pharmaceutical retailers were the only positive contributors, on a year on year basis up 0.8%, 5.8% and 3.3% respectively.

Derek Engelbrecht, consumer products and retail-sector leader at EY, said retailers had for a long while been grasping for positive data points that would support the growth of overall consumption and drive a heavy discount environment.

Engelbrecht said the diversification of offerings within retail was driven largely by the need to drive sales.

"Retailers can't survive by only selling items on promotion because in many instances they have been deeply discounted. Their main intention is to get you through the door," he said.

"The trick, of course, is to get you to buy things that are not on promotion because that's the way they manage the profitability of the basket.

So when you and I are tempted by a particular special, they hope that, when you are in the store, you can also pick up something that's not on promotion and in that way they diversify their revenue streams," said Engelbrecht.

Massmart, which recently entered grocery retailing, reported that total food and liquor sales were growing at 11.7% for the year.

General merchandise, however, rose only 1.5% and DIY total sales grew by 5.6%.

The group's roll-out of 88 Game stores now offers food, and although not yet in all stores, food and liquor sales grew 11%.

Yet Schreuder said that for the retail industry, maintaining momentum in a difficult economy had "been a long race".

"You've started sprinting, but then someone moves the finish line," he said.

Pick n Pay was expected to release its 2017 full-year results on April 19.