Pick n Pay is putting a brave face on its turnaround effort but analysts say it will struggle to regain market share in the highly competitive retail grocery sector.
Once the biggest player in the sector in South Africa, Pick n Pay went into decline for several years and is now, under returning CEO Sean Summers, undertaking its latest operational overhaul.
The company has propped up its balance sheet by raising R4bn from shareholders to pay off debt and plans to list subsidiary Boxer on the JSE this month.
Speaking this week at the results presentation for the half-year to August, Summers said the restructured balance sheet meant money was available to refurbish some existing stores, open new ones and improve on the brand’s fresh produce, butchery and bakery offerings
“We also need to carry on with the revitalisation of the people within the business and franchise stores. So we look to the second six months of this year with great positivity. We are quietly confident that we should be able to halve the operating loss of the underlying Pick n Pay supermarket operations.”
Jan Meintjes, portfolio manager at Denker Capital, said there were no guarantees the group would return to profitability within the next few years. “It will be a mammoth task, especially as their competition is now much stronger and executing very well on their strategy. I do believe there could be value in a Pick n Pay turnaround, but it will take time and the end result might be an even smaller business than envisaged at the moment.”
Sasfin Wealth senior equity analyst Alec Abraham said: “From the outside, there is limited visibility on the progress and the exact trajectory of the turnaround. Having said that, I am fairly sure that Pick n Pay will return to profitability given the intense focus on cost reduction and optimising the store network.
“That is not to say that Pick n Pay will recover the market share they have lost in recent years; I think the competition is way too strong and consumers are faced with multiple shopping options, most of which are more competitively priced than Pick n Pay at this stage, and offering the same or better ranges, shopping experience and/or convenient locations,” Abraham said.
Shane Watkins, All Weather Capital’s chief investment officer, said he did not subscribe to the narrative that Shoprite was so dominant that its rivals had little hope of growth.
“This negative thesis is not borne out by the facts.” Smaller players such as Food Lovers Market and Boxer (owned by Pick n Pay) were profitable and growing.
“But it’s a bit of a ‘show me first’ story so some investors seem to have chosen to wait for better evidence of the turnaround before buying the share,” said Watkins.
To attract customers back, Pick n Pay has added 3,000 products to its shelves.
“There will be more variety of enhanced range, there will be more variety reintroduced into the stores,” Summers said.
There hasn’t been enough attention back to the house brand within the company. I don’t believe that the programme has been particularly well attended to, and that’s something that’s receiving our urgent attention
— CEO Sean Summers
“There will also be a lot of focus on reinstating house brands. There hasn’t been enough attention back to the house brand within the company. I don’t believe that the programme has been particularly well attended to, and that’s something that’s receiving our urgent attention.”
Group turnover grew 3.7% to R56.1bn for the interim period. Losses after tax widened to R827.4m from R571.3m. Boxer and Pick in Pay Clothing were once again the star performers.
Pick n Pay has just over 1,000 supermarkets in South Africa, 392 clothing stand-alone clothing stores, and 631 liquor outlets. The company said 14 underperforming stores were closed during the period, while others have been converted to Boxer or sold to franchisees. “We are steadily progressing to a better performing and more profitable store estate… Our estate is starting to make a great deal more sense.”
All Weather Capital said it was still seeing significant upside in Pick n Pay. Watson said assuming Boxer was worth about R25bn, at the Pick n Pay share price this meant investors would be getting the core Pick n Pay business for minus R8bn.
“This core business which you are ‘being paid to take’ consists of 366 very profitable clothing stores, 300 profitable liquor stores, 473 franchise stores, 300 company-owned supermarkets and 21 Pick n Pay Hypers,” he said.
“For our investment thesis to be successful it will require these loss-making stores to be turned around. But after the rights issue and the Boxer IPO, Pick n Pay will have zero debt and be sitting on cash of around R4.5bn, which will buy management more than enough time to turn around the corporate stores.”
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