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Send  Share  RSS  Twitter  23 May 2010

RETAILING: PnP's Game-Plan With its Margins


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CAPE TOWN headquartered supermarket giant Pick n Pay has issued its first set of results without long serving founding executive Raymond Ackerman at the helm.

In March Ackerman, who founded the retail business more than four decades ago, officially stepped down as the executive chairman.

While the Ackerman family still has de facto control of PnP, the relinquishing of executive status by Raymond Ackerman might signal a new era for the supermarket chain.

Interestingly, it was Ackerman’s parting remarks at his farewell function (as reported on the company’s website) that had much bearing on the year to end February results. The results, if anything, suggested the group is a little off the boil.

The PnP website reports that at his farewell function Ackerman said he did not doubt for a moment that Pick n Pay would continue to espouse his consumer sovereignty philosophy - ‘putting customers before profits’.

While citing his main rival, Shoprite CEO Whitey Basson, as a good operator, Ackerman claimed he never had any ambition to make a 5% operating margin (the astounding trading margin Shoprite reported in its last financial results).

Ackerman pointed out that PnP’s operating margin had traditionally been about 3%-3.5%, and suggested “that if it gets much higher than that in future we should cut prices”.

Now CBN wonders how many PnP shareholders will be asking whether the group did exactly that with the year to end February 2010 results showing the margin markedly down at 3%.

In 2009 the margin was 3.4%, while it was 2.7% in 2007 and 2008.

Now these fractional changes in percentages may not sound like a lot, but for a group that is turning over billions of rands worth of mainly non-durable stock a percentage point is a very big deal at bottom line.

PnP reported a slight drop in trading profit to R1.653 billion.

The squeeze in trading margins is perhaps not so unexpected as food inflation has tapered off markedly over the last 18 months. But some observers will be asking why Shoprite’s margin remains so much fatter.

Of course, a much more important consideration in retail is sustainable margins. And perhaps PnP is being prudent – at least in terms clinging to market share in a promiscuous market – by building on its reputation as a discounter. After all, retail is a volumes game…

PnP’s presentation stresses defending and growing leadership in the LSM (living standards measure) 8-10 ‘heartland’ – which CBN presumes means the suburbs.

Important thrusts here are PNP’s Private Label initiative, Fresh and the new Express stores (in BP forecourts).

There is also a focus on bringing the best of PnP to the LSM 4-7 markets (lower income earners), which entails the ongoing conversion of Score stores to PnP brand and reinforcing price perceptions.

PNP CEO Nick Badminton reports that the ‘Fresh’ concept had seen growth of 17% and was gaining market share, while the private label business had shown a 15% growth.

As regards the Express roll-out, Badminton said a further five stores had been opened.

He said there was a long-term trend towards convenience shopping and that options were being considered for an aggressive roll-out of Express stores.

PnP appears to be gaining traction in the LSM 4 to 7 market (where Shoprite holds a dominant position) with Badminton reporting the run rate sales in converted Score stores to have grown by 178%.

The presentation shows that 52 Score stores were converted to PnP outlets and another 18 into Boxer stores. More than 50 unviable Score stores were closed or sold.

Badminton expected “significant upside” form the converted stores in the current financial year (to end February 2011).

So while the margin range has been set by the founding father, perhaps the more important number going forwards for PnP will be market share – a topic that has already been hotly debated.

But with a better-focussed ‘brand’ spread PnP’s top line number – notwithstanding benign food inflation – could charge up and give an uppity Shoprite something to think about in 2011.


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