Pick n Pays plan to topple Shoprite The retailer goes into attack mode with the separation of its Pick n Pay and Boxer brands in its biggest shake-up since it was founded 55 years ago 19 MAY 2022 ADELE SHEVEL Pick n Pay is splitting itself up and accelerating the rollout of Boxer stores in arguably its biggest shake-up since it was founded 55 years ago. Dutch CEO Pieter Boone describes it as moving out of defence mode and into attack. The group which for almost two decades now has lagged its once much smaller rival Shoprite has taken flak for being too broadly spread across its customer segments. Its hoping the strategy will spur growth in less-affluent markets, while also challenging rivals such as Woolworths at the top end. The plan for Boxer, catering to lower-income consumers, is to double sales over the next four years. Boone says the combined brands will give unrivalled proximity to customers. You take so much complexity out of the system. Imagine what that does for all of your processes, stock holding, wastage, shrinkage ... and [for] clarity when it comes to providing your customer offering and the way you communicate. A partnership with Takealot, the countrys biggest online retailer and digital delivery company, will also be launched in metro areas in August, delivering on-demand sales from Pick n Pay. Says Evan Walker, portfolio manager at 36One Asset Management: I think their tie-up is interesting. Thats where Shoprite has taken some market share with its Sixty60 offering and Pick n Pay might claim that back. Boone acknowledges that Pick n Pays overall market share has stagnated over the years, blaming a lack of differentiation and price competitiveness. The retailer has served all income groups in the same way, across one label, whereas Shoprite Holdings, for example, is split into Shoprite stores for the lower end and Checkers for the middle- to upper-income customer. Boone hopes the new structure will enhance shareholder returns and reckons the changes should lead to a 3% gain in market share by financial 2026. While Pick n Pay shares have bested Shoprite year-to-date theyre up 13% against 7.7% for Shoprite over three years the performance is decidedly less impressive. Against Shoprites gain of 37% and 2 Woolworths increase of 29%, Pick n Pay shares have delivered a negative 7% to investors including dividends. In practice, the rejig means Pick n Pay outlets will split into a blue, upper-end division, and a red division aimed at the middle-income segment. The stores will offer a more focused range of items to boost efficiency and reduce costs; savings can be passed on to consumers, much like the discounters Aldi and Lidl have done in Europe. It also frees up cash which can be reinvested back into the business. The three brands Boxer and Pick n Pay red and blue will each have its own leader. While it seems, at first glance, somewhat cosmetic, this is not a PR initiative or a quick fix, says Boone. Yet Walker says the changes are basic retailing; its not rocket science, he says. Much of the inspiration for the change comes from European discounters and Boone says a Pick n Pay team went to Europe to study trends. We all know that the discount models were born there, theyve got good insights and context. Its unlikely to be an overnight win, however. Boxer took a few years to come right, but, says Boone, it is now performing outstandingly thanks to consistency in execution, a fixed range of 3,000 [products] not one more, not one less and fixed responsibility to one person. They changed about a fifth of top management to create more speed in the business. 3 Boxer, he says, with its large own-brand turnover, is the cheapest option for the groups customers, yet is still aspirational. Pick n Pay red stores will have a range of 8,000 stock-keeping units (SKUs), offer low prices on key lines, be convenient and provide excellent service. The blue stores will cut their SKU count from 25,000 to 18,000 and will focus on fresh produce, meat and baked goods. The first seven red pilot stores are open four in the Western Cape and three in Gauteng. By the end of the calendar year there will be 190 of them. Boxer is already a separate company headquartered in Durban, while Pick n Pay operates out of Cape Town. Each has its own distribution centres. The group conducted more than 7,000 customer interviews to obtain feedback and consulted franchise partners. Boone says the group has a loyal customer base, but: Trying to serve everybody, but not in the most optimal way ... We need to improve the service we have towards the customers and improve the price perception. At the moment, the new red stores are referred to within the group as Project Red outlets, but Boone says this is a temporary working title. He thinks he knows what the permanent name will be, but first he has to test it out. You can only change the name of the sub-brand related to Pick n Pay once. I want to do proper customer testing ... I think I have the name but give us a few more weeks. Boone, who was previously COO at Metro AG, a German food wholesaler, has now been CEO for 12 months. Last years riots were clearly part of a baptism of fire but, he says: Ive taken it from a different angle. [SA] is a fantastic country, it has huge opportunities to grow, we have a young society that is evolving as well, and if you look at the development of the formal food and grocery market in the next five years, its due to grow an additional R200bn. And we would like to be part of that. SAs food and grocery market was valued at R628bn last year and is forecast to be worth R855bn by 2026. Pick n Pay has a total market share of 16%, which breaks down to a 23% share of the more affluent market valued at R112bn and a share of just 11% of the less affluent market of R408bn. One thing plays in their favour, says Alec Abraham, senior equity analyst at Sasfin: this whole disruption in the property market is likely to have opened up sites in areas, so it will make it easier to achieve 200 stores in three years for Boxer. As for the partnership with Takealot, Pick n Pay will piggyback on the Mr D app, which has 2.5-million active users. Asap! Pick n Pays current on-demand offering will be integrated into the system. 4 Clearly, Shoprites success with Sixty60 has caused much soul-searching within the company, though Asap! has shown triple-digit growth, week after week, says Boone. How did the Mr D partnership come about? As a newcomer in a country youre invited for a lot of cups of coffee ... and I have to say Kim [Reid, Takealots founder] and I created a good chemistry and you know ... one cup of coffee leads to some reflections and from there ... We have been working on this more than 10 months. The goal of the four-year plan is to deliver group turnover growth at a compound annual rate of 10% double the 5.2% increase in turnover for the 52 weeks ended February that Pick n Pay announced this week. While profit before tax and capital items surged 24.9%, headline EPS were up a more modest 14.5% to 262.59c, yet the retailer upped its dividend 23% to 185.35c a share. Once again, Pick n Pays clothing division had an outstanding year, with sales up 21%. A strong start to the 2023 financial year has seen sales grow 9.9% over the first eight weeks, despite an increasingly grim picture of decay, sketched by chair Gareth Ackerman this week. There is little management of infrastructure and service delivery is very poor. So poor, that we are finding it difficult in some places to secure insurance of our assets, he told analysts in the companys results presentation. The long-term consequences of last years riots mean increased security and insurance costs for the foreseeable future. At the same time, SAs retailers face yet another grocery market inquiry by the Competition Commission, which Ackerman derided as a cost in both money and time. It would be helpful if government agencies concentrated on the job at hand, he said. Pick n Pay has put no price tag on the shake-up, which it says will be funded through cost savings, better cash management and working capital, as well as some medium-term borrowing. Investors are likely to see more detail in segmental sales reports from the first half of this financial year. Boone says Pick n Pay has been seen as a conservative company, and kept its cards too close to its chest. Lets be open, lets share the information. There are levers in the business that are performing very, very well. There are levers in the business where we can improve. Clearly in the retail part we can and will improve. Questions: 2.1 Pick n Pays overall market share has stagnated over the years Discuss the possible reasons for this stagnation. (10) 2.2 Identify the strategies that Pick n Pay is embarking on. (6) 2.3 Provide an evaluation of the proposed Pick n Pay strategy, including an assessment of the risks attached to this strategic direction. (14) 2.4 The implementation of the proposed strategy will entail significant change at Pick n Pay. Discuss the change management process that Pick n Pay must follow to achieve the desired change. (10) 2.4 Explain the following statement in the context of the article: Boxer, he says, with its large own-brand turnover, is the cheapest option for the groups customers, yet is still aspirational. (5)