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UPDATE 1-S.Africa's struggling Pick n Pay to cut prices
April 23, 2013 / 2:36 PM / 5 years ago

UPDATE 1-S.Africa's struggling Pick n Pay to cut prices

* To spend 1.8 billion rand on new stores

* Diluted headline EPS at 109.6 cents vs 157 cents

* Consensus: 111 cents (Recasts with CEO, analysts’ comments)

By Tiisetso Motsoeneng

JOHANNESBURG, April 23 (Reuters) - The new chief executive of South Africa’s Pick n Pay said he planned to win back market share by cutting prices, a risky strategy for a retailer already hurt by weak margins.

South Africa’s second-largest grocer has lost ground to rivals Shoprite and Spar, after failing to invest in its supply chain and open new stores.

Richard Brasher, the former head of Tesco’s UK unit, who joined Pick n Pay as chief executive this year, has inherited a company with sliding profit and the thinnest operating margin in its industry.

On Tuesday it reported a 31 percent drop in full-year earnings.

“It is quite clear that we have, as company, spent too much and to date delivered too little on the investments we made,” Brasher told a results presentation in Cape Town.

“We should be a determined discount operator,” he said, adding the grocer would increase its focus on South Africa’s millions of lower-income shoppers.

So far Brasher has had mixed results with his cut-price strategy. The “Big Price Drop” campaign he championed at Tesco was widely seen as a failure, leading some in the British press to dub it the “Big Price Flop”.

Analysts say Pick n Pay is unlikely to deliver lower prices in the near future, given recent costly investments in its distribution network and the roll-out of a customer loyalty programme.

“If Pick n Pay is able to cut costs via eliminating inefficiencies in the background, it will be able to offer products at lower prices to both affluent and low-income customers,” said Tatjana Wolff, an analyst at research firm Planet Retail in Frankfurt.

“However, I doubt this will be realistic within the short term.”

WEAK MARGINS, HEFTY DIVIDENDS

Pick n Pay’s operating margin has averaged 3 percent over the last five years, the worst among nine major South African retailers, Thomson Reuters data shows.

Its share price has barely budged over the past three years, while that of rival Shoprite has more than doubled.

Nonetheless, the grocer has not scaled back its dividends, much of which flow back to the founding Ackerman family which holds a controlling stake.

Some analysts say the money needs to be spent on operations.

“When you look at their capital requirements over the next three years, they going to have to inject a lot more capital into that business to sustain it,” said Evan Walker, an analyst at 360ne Asset Management in Johannesburg.

The company said it would spend about 1.8 billion rand ($194 million) on expanding its business this financial year, mainly through opening new stores.

But Brasher and Chairman Gareth Ackerman, the son of Pick n Pay’s founder, said there was no immediate plan to change the policy of paying out 75 percent of its earnings as dividends.

Pick n Pay reported diluted headline earnings per share of 109.6 cents for the year to end-February, down 31 percent from the previous year and a touch below the 111 cents forecast by Thomson Reuters StarMine.

Headline earnings, the main measure of profit in South Africa, exclude some one-time items.

Shares in Pick n Pay were up 1.7 percent at 42 rand, in line with the broader Johannesburg All-Share index. ($1 = 9.2715 South African rand) (Reporting by Tiisetso Motsoeneng; Editing by David Dolan and Helen Massy-Beresford)

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