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Pick n Pay badly needs a pick-me-up

Pick n Pay's profit warning, which should be seen against a superior performance by its competitors, points to what some analysts have described as the worst period in the retailer's 43-year history.
Pick n Pay badly needs a pick-me-upThe retailer, which has long been seen as the supermarket of choice and the consumer's champion, is working to regain direction after losing its way.

Its problems are not new. For some years now, increasingly competitive rivals have been chipping away at market share.

It is estimated that Pick n Pay's market share has dropped to 34.1% (forecast for 2011) from 36.5% in 2007, including franchises.

At the same time, Shoprite increased its share from 32% to 34.1%, excluding franchises.

Woolworths share has also dropped - from 7.5% in 2007 to 6.4% for 2011, but is back on a growth track. Spar's has edged up from 24% to 24.9%.

Pick n Pay reports results tomorrow, but it has already warned that headline earnings a share from continuing operations would drop by between 10% and 25% for the year to February.

"This type of profit warning from a proper blue-chip business in a defensive industry is inexcusable," said Evan Walker, fund manager at RMB Asset Management. "We've never seen the business in a worse position."

The poor numbers reflect a strike, low food inflation and continued margin pressure.

But while identifying the problems is easy enough, they run deep. Pick n Pay has been slow to upgrade its stores and many are old and stodgy.

It has had continuing problems with unions and has been beset by strikes and an inefficient workforce. This despite it spending more on its workforce than competitors - 60% compared with Shoprite's 50%.

Its hypermarkets are struggling to find an identity. They are not proving as successful as some other chains with big-ticket items, nor are they quick and easy to access. And they are set to face more intense competition once Walmart finally arrives in SA.

Pick n Pay has not moved into the rural areas as adeptly as Spar and Shoprite, although its family franchise, which has smaller stores, has expanded quite rapidly.

It did not invest in centralised distribution when competitors were doing so; now it is playing catch-up.

It had hoped that the R1.4-billion from the sale of Franklins in Australia would have helped fund its capital expenditure programme, notably its central distribution warehouse. But regulatory issues are stalling the sale.

"The business consistently disappoints, and there's a lack of depth at management level to correct the perceived over-dominance of the (Ackerman) family," says a fund manager.

Some analysts are concerned with the company's "obsession" (driven by the founding Ackerman family) of paying out a big percentage of profits in dividends at the expense of reinvesting in the business.

The group pays out 60% to 70% of net profit after tax in dividends, which means there's not a lot left to invest in infrastructure.

A fund manager says the family is too stuck in its ways: "They're not prepared to move faster and make the hard decisions."

Pick n Pay had to raise R500-million through the sale of three-month debt to improve liquidity and fund expansion, notably its central distribution facility.

"Nothing is working well at the moment," says Walker.

Nedcor retail analyst Syd Vianello says Pick n Pay has been lagging its major competitors in terms of increasing its footprint. Its growth has been primarily in franchise stores, which means only a percentage of those goods are bought through the Pick n Pay system. "If you're rolling out space through a franchise model, your turnover growth automatically lags those of competitors," says Vianello.

He adds that Pick n Pay's costs relative to competitors' are "ludicrously high".

The group has had relatively low volume growth and moderate store expansion, while the costs of restructuring are high.

Analysts reckon Pick n Pay no longer knows its customer and target market. It is losing market share to Woolworths at the at top end, and to Shoprite in the middle- and lower-income markets.

Shoprite is the retail sector's star performer and has stormed ahead, opening many stores. It is expanding aggressively locally and in Africa and maintains high margins - 5.1% against Pick n Pay's 2.9%.

In its latest interim results, Shoprite reported a 13.6% increase in diluted headline earnings per share.

Pick n Pay is now investing in central distribution, which will improve inefficiencies, reduce the cost of doing business and simplify the organisational structure.

Management is also taking a tougher stance with unions.

A new marketing executive, Bronwen Rohland, was appointed at the end of last year, replacing Jonathan Ackerman, who is now the customer director. Under Rohland, a loyalty card was launched recently.

This is the second time one of the sons of founder Raymond Ackerman has been shifted from his post. Jonathan's brother Gareth was joint managing director, but he left (analysts say he didn't make the grade) and was appointed chairman in March last year.

Vianello says there is nothing "fundamentally wrong with the business", but customers are not coming to the stores like they used to.

"To turn a ship like that around won't be done quickly," he says.

Pick n Pay will expand locally through its Boxer stores, and Express outlets at BP petrol stations. Moving into Africa is a priority, and increased company-owned store growth is on the cards.

The group operates in Zambia, Botswana, Swaziland and Lesotho.

Source: Business Times


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