OPERATIONAL HIGHLIGHTS

PICK N PAY RETAIL DIVISION

Hypermarkets

We opened 2 new Hypers this year at Woodmead in Johannesburg and South Coast in Durban. Customers have been very positive about the new format used in these stores. We will therefore continue the refurbishment of the existing Hypers along similar lines.

The Hyper division traded strongly during the year, with the new format and refurbished stores doing particularly well.

Supermarkets

During the year we opened 5 new corporate and 12 new franchise stores. We also converted 4 stores from corporate to franchise in line with our ongoing review of store operations to ensure that we utilise the best formula for each trading site. In the year ahead we plan to open 4 new corporate and 15 new franchise supermarkets and convert a further 2 corporate supermarkets to franchise.

In addition to the above, we converted 27 Score stores to the Family franchise brand and next year we will convert another 25. These conversions are in line with our strategy to give consumers in the lower income brackets the Pick n Pay shopping experience they desire and to create franchise opportunities for black entrepreneurs.

Supermarkets continue to show robust turnover growth, particularly from our new-look refurbished stores such as Claremont, Benmore and Bedfordview. Based on the positive uplift in turnover from the 23 supermarkets (11 corporate, 12 franchise) refurbished in the current year, we will be expanding our new-look refurbishment programme in the year ahead to another 54 stores (21 corporate, 33 franchise). This significant investment shows just how confident we are that there are benefits to be derived even in very tough economic conditions.

Liquor and clothing stores

In the current year we opened another 24 (14 corporate, 10 franchise) liquor stores and 1 clothing store. These stores continue to give great value propositions to customers.

Strategy implementation

The implementation of the six-pillar strategy we developed in 2007 is continuing rapidly. We are already seeing the positive results from the changes we are making and are very confident that the benefits from the capital and management expertise invested in this strategy will pay dividends for decades to come.

Under each of the strategy pillars, a few of the success stories so far include:

Customers

Defend and grow leadership in Living Standards Measure (LSM) 8 – 10 heartland

The majority of our sales and profit is generated by serving our more affluent LSM 8 – 10 customers. Delighting these customers remains the primary focus of our strategy. We have made many improvements to our offer, all of which have received very positive customer feedback. These include:

• Improvements to each of our store formats
  • The new Hypermarket format continues to trade strongly having broad appeal to all our customers;
  • Our refurbished flagship supermarkets at Benmore and Bedfordview in Johannesburg and Claremont in Cape Town have delivered outstanding growth in turnover;
  • Our small supermarkets continue to grow strongly; and
  • Pick n Pay Express, our forecourt joint venture with BP, was launched in December 2008 with 2 stores in Cape Town. Customers love this new format giving us confidence to trial at least 2 more stores in the year ahead.
• The re-launch of our private label brands. During the year we re-launched our mainstream private label brand “PnP” upgrading many of the products and repackaging over 1 000 items in our new branding.
• The continued improvement in the range and quality of our fresh food products.
• The roll-out of our revitalised branding continues. Each of the customer-facing initiatives implemented has benefited from the new look and feel.
  
  

Bring the best of Pick n Pay to LSM 4 – 7

Expanding our presence in the emerging LSM 4 – 7 market is a significant growth opportunity for the business. We know from our own research that customers love our brand and our stores and are deeply frustrated that we don’t have sufficient stores near their homes. We also know this part of the market is growing rapidly as the government continues to invest in social grants. We are addressing this opportunity with vigour through our Score conversions. We now have 29 conversions to Pick n Pay Family franchise complete, as well as nine conversions to Boxer. Each of these stores is achieving substantially higher turnovers once converted than they did as a Score. Next year we plan to convert a further 29 stores (Family franchise 25, Boxer 4). The only stores remaining to be converted in the 2011 financial year are our Score stores in Botswana which will trade as Family franchise stores.

In total, we now have 66 Pick n Pay stores and 77 Boxer stores serving this market and we expect this number to grow significantly over the next few years. Over the last year our customer count in this market sector has grown by 18%. 52% of Pick n Pay’s customers representing some 40% of spend now come from LSM 7 and below. To enable us to focus appropriately we have a separate team within Pick n Pay concentrating on this part of the market.

Operations

Invest to improve the operating model

The SAP implementation is 65% complete, with the remaining Pick n Pay regions to be completed in the next 18 months. We are seeing clear benefits from this investment: Our supply chain is more efficient, we have faster response times for new business development and have improved our electronic trading capabilities.

Phase I of our supply chain plan is now complete. The Longmeadow Distribution Centre in Johannesburg is now fully operational with all set-up costs absorbed. The distribution centre now supplies all 263 inland stores. Phase II will expand the facility to accommodate central distribution, automated replenishment and strategic buy-ins. This expansion will commence during the 2010 financial year.

Continue to deliver operating efficiencies

We continue to be highly focused on reducing our operating expenses as a percentage of sales. This year we achieved a reduction of 0.2% of turnover.