Pick n Pay to woo customers with food price cuts and discounts

Pick n Pay is ramping up the next phase of its turnaround strategy by rolling out more stores and cutting food prices for hard-pressed consumers as the battle for their wallet share among retailers in SA rages on.

“Customers are shopping around for lower prices and the best way to improve Pick n Pay is to run a better shop. We have to be leaner, fitter and stronger,” CEO Richard Brasher told Moneyweb.

Pick n Pay is going back to retail basics of improving the customer experience, revamping stores and investing in price – which arguably it has neglected.

“We are now in a good shape and have not run out of ideas,” said Brasher, who was roped in nearly four years ago to turn around the fortunes of the then beleaguered chain.

However, the turnaround still has two-to-three years to go.

Underscoring this is that sales for the year to February 26 2017, grew by a moderate 7% to R77.5 billion. When comparing selling price inflation of 6.1% with like-for-like sales (existing stores) of 3.4%, sales slid by 2.7%.

Part of the catch up plan includes R1.8 billion capital expenditure into new stores and refurbishments in 2017/18, significantly up from R816 million three years ago.

Since 2015, the retailer has been rolling out convenient and “next generation” Pick n Pay and Boxer stores, modern formats with faster checkout points and a wider offering of fresh food, clothing and personal care.

It opened 150 new stores during the period under review – with 106 being next generation stores while it refurbished 62 stores.  And its next financial year won’t be different.

The new-generation store format is enabling Pick n Pay to better utilise store space, which has also been made possible by its back-end investments. It has invested in distribution centres over the past 10 years in the Western Cape, Gauteng and is filling a gap in KwaZulu-Natal with a new centre in the region. Supply chains enable grocery retailer to extend their fresh food offering, manage costs and control stock availability.

Cratos Capital portfolio manager Ron Klipin said Pick n Pay is behind the curve on distribution centre investments, but its making process in a very competitive market.

“It’s still lacking in terms of fresh, whereas Shoprite has put in a lot of time and money in making fresh available at its stores.  The Checkers brand is really starting to get on the Pick n Pay and Woolworths’ turf in terms of fresh and higher margin private label brands,” Klipin added.

To drum up sales, it has also committed more than R5oo million in slashing prices of key basket items, including meat, fruits and vegetables. Over the past two years, it has aggressively launched over 1 700 private label brands. And its loyalty programme Smart Shopper has been relaunched to offer weekly personalised discounts and coupon combinations to its 11 million customers.

Slashing food prices

But its efforts to woo consumers are coming at a cost, as it seems that Pick n Pay is sacrificing margin growth. Trading profit margins – a key metric used in the retail sector for profitability – increased from 2.1% in the previous year to 2.3%.

“In broad terms, Pick n Pay is just not getting sufficient top line growth, which is a bit worrying… Ultimately, it’s going to boil down to the retailer growing market share in a very difficult market where consumer expenditure is under massive pressure as is competition,” said Klipin.

Although portfolio manager at Rexsolom Invest Anthony Rocchi commends Brasher’s retail magic on Pick n Pay, he rated the retailer’s turnaround as “overpriced” given its stock that trades off a 19x forward price earnings at R64/share.

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“The stock is priced like a growth stock. I don’t expect Pick n Pay to return to their former profitability because the competition from Shoprite and other retailers is much stiffer than it was back in 2008/9,” said Rocchi.

Brought to Moneyweb