Quest for best weighs on Pick n Pay

Once the leader of the South African retail pack, Pick n Pay has increasingly come under fire for its "ludicrously high" costs, industrial action issues and lagged growth that has seen it try to play catch-up to rivals Shoprite and Woolworths.

In February it reported an 18.3% decline in full-year profit for what it described as the toughest trading period in its 44-year history. Shoprite meanwhile, saw a 9.8% rise in turnover in the 52 weeks to June for its Checkers brand.

"A lot of what's happening with Pick n Pay is the culmination of a confluence of strategic errors that opened the door for Massmart - entering Australia, not concentrating on general merchandise in their Hypermarkets, not putting in centralised distribution timeously and not keeping ahead of the pack with IT," said Absa Investment analyst Chris Gilmour.

In September, ratings agency Fitch downgraded the company's national long-term rating to 'A(zaf)' from 'A+(zaf)', reflecting their expectation that Pick n Pay's weakened credit profile would recover at a slower pace in financial year 2012/2013 than the agency previously anticipated.

The Cape Town based retailer said that given the high level of investment in its transformation strategy, headline earnings per share and earnings per share from continuing operations would be down by between 35%-45%, for the period under review.

"The main contributors to this are the upfront launch costs of Smart Shopper, the planning for a specialist category buying organisation and the continuous investment in an efficient centralised distribution system," it said.

On a brighter note, the group's turnover is expected to be positive despite the continued tough economic conditions, dominated by low inflation and a highly competitive trading environment.

At 7.4%, Pick n Pay attributed the increase to the introduction of its Smart Shopper loyalty programme launched in March, which now has over 4 million customers.

And some more good news was that after a 15-month saga, the company finally completed the R1.3 billion sale of Franklins to Sydney based Metcash in September.

After failing to gain sufficient scale in the Australian retail environment, which is dominated by Coles and Woolworths, analysts lauded the South African retailer's decision in July last year to quit the market. Proceeds from the sale will be invested in the group's South African operations.

Pick n Pay said Franklins would be disclosed as a discontinued operation and the transaction would only be accounted for in the second half of the financial year.

Though the Australian Competition and Consumer Commission's (ACCC) appeal hearing of the deal is still scheduled to take place from 24 October 2011, Pick n Pay's departure from Australia will enable it to focus on getting its house in order.

"It's a pity they got side-tracked by going into Australia. Twenty years ago Pick n Pay was well in the lead. Now what they're doing is playing catch-up at a frantic pace," Gilmour said.

The group's attention in recent months has also been directed on its African expansion plans, which according to Gilmour was a good move.

"They have to look at Africa. Our local market is on its way to being saturated. The kind of growth they'd get in Africa easily eclipses the kind they get in SA," he said.

Late last month it opened its first Mauritian store, following its first store opening in Mozambique in June and its second store opening in Zambia in March.

Among SA's big retailers, the Pick n Pay has the smallest portfolio outside SA, while Shoprite has the largest.

The company's results are due on Wednesday 19 October.