Pick n Pay earnings drop 34%
RICHARD van Rensburg is deputy CEO of Pick n Pay.
SUMMIT TV: Pick n Pay saw a 34 % fall in headline earnings per share, with cautious consumer spending and tough competition. The giant retailer also lagged the competition losing some market share. The numbers are predictably not great — some might even call these numbers horrible. There seem to be problems in every aspect of the business?
RICHARD VAN RENSBURG: These are obviously very disappointing results — but I think it needs to be looked at in the context of the decisions we made as an executive in the last six months to drive our change programme forward. We took some decisions to incur some costs to extract ourselves out of certain contracts so that we could take control of distribution and the effect of that has been negative in these results, but we are very excited by the result this has had and the improvements with our distribution centres and this bodes well for the future. We also decided to centralise our category management teams where we had buyers in all the regions — on March 1 we went live and moved everyone together. That was a huge culture change for Pick n Pay and we had teething problems in the six months as we bedded that down, in very high out of stock levels in our stores, which obviously meant lost sales and that impacted the results.
STV: Could you have avoided the muted growth in turnover?
RVR: Pick n Pay has operated very successfully for nearly 40 years, but in the past two years we have lagged our competitors with changes in our business process model — it was very important to make these changes now, and we had to move towards centralised distribution and away from store-based ordering to scientific forecasting, demand planning and automatic replenishment, we had to move from decentralised buying teams to centralised category management teams, and we had to move from decentralised, independently operated stores to standardised execution across the country for promotions throughout the country. All those changes are huge and make very big impacts on the way we run the business, and we are right in the middle of that transition now, which is having a negative effect on our results.
STV: Could you have been more aggressive with new store openings? As you say, you’ve lagged behind your competitors…
RVR: The old operating model made it very hard to trade profitably with smaller format stores — because the costs were decentralised in the stores in the regions. The new operating model will take costs out of the stores and out of the regions and build that into a centralised service centre, which allows us to operate individual stores on a much lower cost basis. We are very comfortable now that we will achieve those cost savings so at the beginning of the year we gave the property development teams the go and we are now starting to open the new stores. It takes a while to fill up the pipeline and negotiate with the property developers, to find the sites, where each decision is big because you’re in for the long term — but we have been encouraged by the speed at which we have been able to move. We will open 225 new stores over the next 18 months and that will represent space growth of 12%, which is way in excess of what we have done in the past and that will allow us to protect our market share going forward. We are very excited about that.
STV: So smaller-format stores are off the table?
RVR: No, many of the stores will be smaller format, where of the 225 stores 119 will be Pick n Pay Supermarkets; and of those 119, 30 will be Pick n Pay Express stores in terms of our agreement with BP, and the remainder will be across the formats but biased towards the smaller-format stores in the suburbs and nearer consumers. If we look at our existing portfolio, those are the stores that are growing the fastest, with a global and local trend for consumers to shop more often and buy less each time and to shop at nearby stores. We need to catch up with our footprint to make sure we have stores in those locations.
STV: One positive in your interims is that you’ve bagged 5.8-million Smart Shoppers but that did cost you…
RVR: Yes, it’s a very costly programme — we’ve given R600m in Smart Shopper points to all of our customers since it started and in this period alone we’ve given R186m to customers. We are very encouraged by the uptake where our customers seem to love the programme. For the year ahead we are building up a database of history to analyse the buying habits of customers — not at an individual level but across the LSM (living standards measure) groups — and that allows us to make more informed decisions about ranging and store locations that will in the future boost turnover significantly. Pick n Pay has a big advantage but that comes with a strategic challenge, and that is the research shows our brand has wider appeal than any other retailer across the LSM groups in South Africa but the challenge we have is that we need to appeal to both lower and higher LSMs, which are very different markets, which requires us to segment the markets very carefully to ensure that our ranges meet customer needs, which is what the Smart Shopper programme is playing for us.
STV: Going forward where do you see growth?
RVR: There’s a lot of areas. Already we are growing very fast in Africa — our sales growth is admittedly off a very small base, but that’s over 40% and we are very excited by what’s happening there. Our Boxer business in the emerging markets is growing at over 20% and is growing profitably, and is competing extremely well in the emerging sector. Right at the premium end of the business we have three flagship stores where like-for-like sales growth is close to 17%, where we are accelerating the roll-out of premium stores to hopefully by the end of next year nine or 10 stores open. The area we are struggling the most is in our Pick n Pay Hypermarkets, particularly general merchandise, where sales growth is very weak. We need to address that.