PnP to go for the leaner cut?

CEO Nick Badminton, with chairman Gareth Ackerman right behind him, is determined to reduce the company's cost base and improve its competitiveness. This shows in the wage deal they have just struck with the union. Pick n Pay labour costs are higher that those of its competitors, accounting for 58% of overheads and 9,3% of revenue.

After nine months of negotiations and two weeks of strike, the parties reached a settlement on wages and conditions of employment, valid for the next three years. The deal, which is divided into two 18-month settlement periods, will give employees a R365/month increase across the board for the first period and R400/month for the second. Workers had initially demanded the greater of a R550/month or 12% increase, a 10% staff discount on basic foods, 120 hours a month guaranteed for "variable time employees" and a one-year wage agreement.

High labour costs disadvantage PnP

"Our salary bill has risen significantly in the past three years. We need to be leaner," Badminton told analysts in April.

Pick n Pay's higher labour costs put it at a disadvantage to its biggest competitor, Shoprite, wrote Stephen Carrott, an analyst with Macquarie First South Securities, in a research report. "Employee costs account for 9,3% of Pick n Pay revenue, vs 7,7% at Shoprite"

Higher expenses mean lower margins and ultimately lower net income. Pick n Pay's operating margin of 2,9% is below Shoprite's at an estimated 4,9% for SA operations. This is below international benchmarks presented by Wal-Mart, Woolworths Ltd and Tesco, all at 5,7%, Carrott says.

Pick n Pay management has worked hard to regain ground lost to competitors in the consumer boom.

The next step is to enhance labour productivity. This wage settlement is just one stage of a difficult journey.

Source: Financial Mail