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Send  Share  RSS  Twitter  19 Jun 2011

RETAILING: Pick n Pay Finds Itself On The Ropes


Recent Western Cape Business News

PICK N PAY, the Cape Town-based supermarket giant, appears to be very much on the back foot.

Writing in the company’s latest annual report CEO Nick Badminton concedes the 2011 financial year had proven to be exceptionally tough.

We have experienced a combination of a difficult trading environment and some internal challenges that have contributed to a decline in headline earnings per share from continuing operations of 18.3%.”

But that’s the half of it. While Badminton obviously would not admit it in his annual review, there is increasing evidence that Shoprite Holdings – run by the street smart Whitey Basson – is leaving Pick n Pay in the shade – both in terms of market share and trading margins.

Pick n Pay’s turnover crept up around 6% to R52 billion in the year to end February 2011. While top line growth in a low inflationary environment is encouraging, the gains in sales came at a cost.

That cost was margin crimp – which is rarely a good sign in a massive retail chain. Pick n Pay’s gross profit margin slipped from 18% last year to 17.4% due, according to Badminton, to “aggressive investment in price to regain lost ground after the national strike”.

He adds that the effect of increased franchise participation also reduced the gross profit margin.

The margin issue cuts deeper, though. Pick n Pay’s trading profit was down 13.5% to R1.418 billion with cost inflation exceeding internal sales price inflation and trading expenses bloated by increases in electricity, water, rates as well as the company’s strategic initiatives.

Badminton also acknowledges that Pick n Pay experienced “operational difficulties” at its new Longmeadow distribution centre in Gauteng – which “had a material negative effect on our result”.

The trading profit margin came in at 2.72% - a marked crimping from the 3.3% recorded in the previous financial year. The net margin at after tax profit level was a slender 1.75% - which, put another way, means Pick n Pay is on average banking less than 2c on items sold in its chain of stores.

There’s not much of a comfort zone when a net margin is below 2%, especially when there is substantial competition for shoppers’ bucks from the likes of Shoprite, Spar, Woolworths and now (Walmart controlled) Massmart.

So the R50 billion question…can Pick n Pay punch itself off the ropes?

Badminton appears hopeful. He points out that Pick n Pay has completed the consolidation of its three inland regions into one, which should realise tangible improvements in operating efficiencies.

With the roll-out of SAP (the company’s technology platform) complete, we now have a fully integrated system across the Pick n Pay business, with improved in-store disciplines, more efficient business processes and more timely information enabling better and faster decision making.”

Extensions have been completed to the Longmeadow Distribution Centre, which now stands at 65 000 square metres.

Badminton says Longmeadow now processes half Pick n Pay’s inland grocery value with one million cases handled each week from 44 major suppliers.

He says although significant improvements have been made, the Longmeadow facility is not yet optimal.

Every effort is being made to ensure that Longmeadow becomes the distribution and demand planning blueprint to roll-out to the Western Cape, KwaZulu-Natal, Eastern Cape and another facility in Gauteng over the next three to five years.”

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