“The people who earn a lot of money are a small portion, and then at the base is where your mass market is, where people have limited disposable income, and we’re aiming at that market.”
If one did not know any better, the words could have been verbatim from Pieter Boone, the relatively new CEO of Pick n Pay, who recently unveiled a sweeping strategic overhaul of the 55-year-old grocer that has trailed behind rivals both operationally and in the stock market.
But those are the words of Christo Wiese, an instrumental figure in the transformation of Pick n Pay’s closest competitor, Shoprite, from a six-store company in the 1970s to the one with hundreds across the country after spotting an opportunity in the enormous, untapped market at the bottom of the pyramid.
The strategy made him a billionaire as he largely reproduced it in companies (such as Pepkor) where he had influence. Of course, the Steinhoff accounting scandal dramatically reversed his fortunes but it did not undermine the logic of the cut-price business model.
Boone, the Dutchman with significant experience in emerging markets, is taking the fight to Shoprite for a bigger slice of the SA retail market to become Africa’s No 1 discounter.
Aside from Boone’s plan to keep Pick n Pay’s long-standing middle consumer happy and fighting for a bigger stage in the upper-income market, the cornerstone of his growth blueprint rests largely on Boxer, a discounter founded in 1977 and whose outlets are located at taxi ranks and rural shopping malls — the heartland of the vast budget-conscious customer base.
As companies such as Shoprite and Germany’s Aldi demonstrate, it makes sense for Pick n Pay to sharpen its focus on the low-income market. Like Shoprite, Aldi, alongside Lidl, have perfected the discounted food retailing concept in Germany, making it difficult for outside players to make money in Europe’s largest economy.
Budget-conscious
One would be forgiven for thinking that Walmart, best known for an aggressive pricing strategy as it uses its vast buying power to source goods at lower prices from suppliers, has had to admit defeat in SA, where it has ditched the idea of taking on Shoprite directly in the fresh food market. Its decision to exit Germany in 2006 after taking a $1bn loss is a more explicit admission that Aldi and Lidl have cornered the budget-savvy grocery market in that country.
The second point to make is that the pandemic has not only shifted much of the shopping online permanently, it has also turned millions of people into budget-conscious consumers after multiple industries retrenched workers or forced their employees to take deep pay cuts, some of which have become permanent.
For evidence of how stretched SA consumer finances are, look no further than Stats SA’s data, which show that SA is grappling with a 35% unemployment rate — a sign that many of the 2-million jobs lost during the pandemic-induced lockdown restrictions were not recovered.
According to Pick n Pay’s own estimates, the grocery market is expected to grow more than a third to top R850bn in 2026, and the interesting bit is that more than 60% of that money would come from low-income earners and welfare grants recipients. Who knows, one could possibly add beneficiaries of the unemployment grant, or so-called social relief of distress grant, which was introduced in 2020 when the country was in the throes of the pandemic but that is becoming difficult to take away.
Profit margin
Under such circumstances, it is no surprise to see executives at Pick n Pay come up with the bottom-of-the-pyramid strategy in one of the world’s most unequal societies. They join others in the retail sector such as TFG, the owner of Foschini outlets, which bought Jet in 2020 to launch an onslaught against Mr Price and Pepkor in the market of cut-price clothing.
As coherent as Boone’s plan might be, it is unlikely to deliver quick returns, especially considering that it will be up against Shoprite boasting a profit margin of about 6% — ammunition it can deploy to defend its market share with even lower prices.
But few can dispute that the timing of the plan to make shareholders rich while putting food on the tables of budget-conscious consumers could not be better.
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