Pick n Pay and partner Fortress Reit are developing a new distribution centre, Eastport, in Gauteng to consolidate the JSE-listed retailer’s Longmeadow distribution centre and three smaller facilities.
The distribution centre, scheduled for completion in 2023, will cost about R2bn, including land and construction, with Pick n Pay’s 60% share estimated at about R1.2bn. Pick n Pay has secured long-term funding at a competitive interest rate to fund the purchase, it said.
“We have successfully achieved centralisation for the most part in SA, but our Longmeadow distribution centre is reaching its capacity,” CEO Pieter Boone told Business Day.
He said the partnership with Fortress enables Pick n Pay to buy 60% of the distribution centre. The retailer has signed an initial 15-year lease term with an option to renew for a further five years for the remaining 40%.
Boone said Eastport will serve a large store network in Gauteng, Mpumalanga, the Free State, North West and Limpopo provinces and selected stores in the Northern Cape. “It will also have capacity to support Pick n Pay’s store expansion plans and will cater for future customer demand.”
Eastport will consolidate all groceries (dry goods), perishable and fresh produce, as well as all general merchandise and imported goods into one location and under one roof. This will avoid duplication of supply chain and logistics capabilities, such as trucks and warehouse space in multiple locations, said Boone.
He said occupation will be phased, starting with dry goods, followed by perishables and general merchandise.
Pick n Pay owns the Longmeadow distribution centre and the group has entered into a contract to sell 40% of it to Fortress in 2024 once Pick n Pay takes occupation of Eastport.
“The two companies will collaborate on the most effective long-term solution for Longmeadow — either an outright sale to a third party, or a long-term lease to appropriate third-party tenants,” said Boone.
Located in Gauteng’s prime logistics node northeast of the intersection of the R21 and R25, Eastport Logistics Park is Fortress’s flagship asset. Its development is estimated at R4.4bn on completion.
The Pick n Pay partnership will enable Fortress to develop and own two-thirds of its portfolio in logistics, making the company the largest owner and developer of core, premium-grade logistics real estate in SA.
“Our ability to partner with clients and powering their growth by understanding their challenges and needs in a changing business environment is key to Fortress’s success,” said CEO Steven Brown.
JSE-listed Fortress specialises in logistics and retail property. It owns 53 shopping centres in SA and holds a 23.6% stake in Nepi Rockcastle, which has operations in Central and Eastern Europe. Its SA logistics portfolio is valued at R10bn with its Central and Eastern Europe logistics portfolio valued at R1.5bn.
Boone said the consolidation and centralisation of distribution centres gives the group greater control of the supply chain in terms of efficiency, productivity, transport, scheduling and cost control. “This improves our forecast and replenishment, our service to stores, and on-shelf availability, while also reducing waste.”
The group has 14 distribution centres, 10 of which service Pick n Pay and four service the retailer’s Boxer stores equating to about 312,000m² of distribution capacity.
Its distribution network includes the Inland (Gauteng, Limpopo, the North West, Mpumalanga and the Free State), Western Cape region (the Western Cape and Northern Cape), the Eastern Cape region and KwaZulu-Natal.
“We are determined to centralise the distribution of all product lines nationally, and moving away from direct-to-store delivery from suppliers wherever it is more efficient and cost effective to do so,” Boone said.
According to Jones Lang LaSalle — the New York Stock Exchange-listed global real estate company — many firms have outgrown their distribution centres and due to growth in e-commerce, demand for prime logistics and warehousing facilities outstrips supply.
“We are seeing more of a move by companies to lease distribution facilities as this provides some flexibility if and when the business grows,” said Mieke Purnell, Jones Lang LaSalle SA research manager.
She said the capital that would be used to acquire an asset is now being reinvested into their core operations, typically increasing their return on equity.
In SA, a number of distribution centres are being developed. Apart from Eastport Logistics Park, in Durban Fortress is redeveloping Clairwood Racecourse into a prime logistics park said to be a preferred location for companies consolidating their operations.
Investec Property is redeveloping the old Corobrik site into a modern premium logistics and distribution hub, The Brickworks in Durban, for more than R6bn. Improvon and Nedbank Property Partners are developing Dakota Precinct, a R1.3bn logistics park at Rand Airport in Ekurhuleni.
Equites Property Fund is in the final stages of negotiating five new developments for an estimated R1.8bn and will add 160,000m² of logistics space over the next two years.
John Jack, CEO of Galetti Corporate Real Estate, said a number of tenants on long leases are consolidating their operations with some moving to new facilities or owning the assets such as Pick n Pay.
“These transactions can be really profitable for the tenant provided they get the structure of the transaction right up front,” he said.
Boone said Eastport, with 150,000m² of capacity, will combine more volume into the group’s existing transport fleet, while reducing the number of vehicles now delivering stock to more than 450 stores in the region.
It will be able to deliver 60% more stock daily and weekly into stores than Longmeadow.
“The increase in bulk storage capacity also provides a greater opportunity for strategic investment buys in a rising market, to pass price benefits onto customers in the short and medium term.”
Eastport will also be able to move small quantities of “slower-moving” products through the supply chain to stores without additional distribution costs. “Eastport will enable us to work with more smaller suppliers while also providing customers with an extensive, but tailored product range,” said Boone.
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