In his first results presentation since taking over as CEO, Pieter Boone said Pick n Pay will defend its position to keep attracting consumers from the upper-middle class as the earnings report hints it may be losing market share amid fierce competition for customers.
Pick n Pay welcomed Boone in April, inheriting a company that operates in a crowded food retail market where Shoprite, which is best known for its flagship no-frills chain of the same name, is taking the fight primarily to Pick n Pay in the middle- to upper-income consumer segment with its Checkers outlets.
Pick n Pay, which reported a nearly two-fold jump in profit after tax in the six months to August 29 off a low base, said its budget-friendly clothing business and food discounter Boxer put in “strong performances” as they grew sales above the market average.
But it did not mention any growth in its middle- and upper-end stores, which operate under the Pick n Pay and Pick n Pay Hyper brands.
When asked about whether Pick n Pay had seen market share losses, Boone told Business Day it needed to focus on the middle-range and upper-end segments. “We are recognising the fact that we need to do more in the core and select [upper-end] stores.”
The possible weaker showing in upper-middle-class customer sales suggests that Shoprite’s Checkers outlets, with their focus on high-end customers and its classier Fresh X stores, may be stealing some of Pick n Pay’s share of middle-class customers.
Shoprite said in its latest annual results it had 28 months of market share growth and was seeing growth in middle-income stores.
Pick n Pay is responding to the competition and is improving the layout and design of its higher-end stores. It is adding 300 new product ranges, including vegan and healthier convenience food. Its upgrade is complete in 24 stores and it aims to update the layout and design of 16 more high-end stores by the end of the year.
But Pick n Pay is aware there are consumers who are struggling and it is continuing to focus on its low-end store format and on dropping prices. It has been absorbing food costs, with in-store inflation at 3.6% even as food inflation — which is being driven by rising maize and oil prices globally — was up for the six months at 6.5%.
In an indication of how price sensitive consumers are, Boone announced plans to save R3bn over the next three years, but said this will be reinvested in keeping prices low rather than increasing profits.
Its previous internal cost-cutting target of R1bn over three years was met a year early.
The focus on price also suggests competition is very tight and consumers are not able to absorb costs, which are set to rise as petrol prices increase next month.
All Weather Capital analyst Chris Reddy warned that even though Pick n Pay was doing well in the low-end segment, which will be its primary growth focus for the next five years, its rate of growth in Boxer could be under pressure as Shoprite rebrands Cambridge and Rhino, which it bought from Massmart.
He found the results disappointing as core food and grocery sales were flat year on year. Profit after tax rose 87% to R296.8m in the six months to August 29, with Pick n Pay declaring a 35.8c per share dividend, up 91% year on year, and representing a payout of about R176m.
However, Pick n Pay’s profit gain is skewed as it comes off a low base compared with the same period last year, which included one-off R200m restructuring costs and a R50m bonus to frontline staff.
Its gross profit margin declined from 19.6% to 18.2%, which it said was due to the riots in July. Its gross profit declined by 3.4% to R8.4bn.
Sasfin analyst Alec Abraham said Pick n Pay’s turnaround, which started under previous CEO Richard Brasher, is working. Abraham said lower trading expenses, up 1.9%, excluding riot-related costs, and better use of working capital “are all testimony to the excellent work that Richard Brasher put in to fix the business”.
“It took a little longer than expected to start realising the benefits, but I believe we’ll continue to see benefits flow at least into the medium term.”
At close of trade on Wednesday, Pick n Pay’s shares were up 1.94% at R60.56.
They have risen 20.8% in 2021, but have fallen about 5% since the start of 2020.
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