Deputy Chief Executive and Chief Finance Officers’ report

OPERATIONAL REVIEW

We are encouraged by our improved trading in the six months to February 2012, particularly in our core supermarket business. We have matched the like-for-like sales growth of our major competitors, which suggests that after a number of years, we now have the building blocks in place for a new and improved way of doing business. We have not been as good as we could have been though, particularly in the area of customer service, and there is still much room for improvement.

We are consistently the price leader in South Africa in known value items (KVI) and full basket price checks. Unfortunately there still exists a price perception gap among consumers, with the mistaken view that we are more expensive than some of our competitors. We will focus our marketing to effectively communicate this to customers, in order to be recognised for the value that we provide.

In terms of sales growth per format, our weakest performance comes from our larger format Hypermarket stores, and we are putting the necessary measures in place to address this.

Our short-term operational focus will be on refreshing the Hypermarket format, improving our general merchandise offer and refocusing our marketing strategy to reinforce our larger stores as a superb value proposition for the customer.

The strongest growth has come from our smaller format stores and as such, we are focused on increasing our footprint with these convenience supermarkets. This is an exciting growth opportunity for the Group, particularly in light of our progress in the areas of central distribution and labour flexibility. We will now be able to service small stores effectively from our central distribution centres and, with more flexible labour arrangements, will be able to facilitate deliveries outside of normal trading hours, to reduce costs and increase service delivery to customers.

Our stores in the lower income (or LSM) areas continue to outperform their higher income counterparts in turnover growth. Both Pick n Pay and Boxer stores trade well in this arena and we see these emerging market stores as a significant opportunity for all Pick n Pay brands. Consequently we are looking to grow our trading space in these markets.

Although over recent years growth has benefited retailers positioned in the LSM 4 – 6 market, we believe that South Africa will begin to win the war against poverty and as more South Africans start to prosper, we will see growth increasingly flow into the LSM 6 – 8 markets, our trading heartland. We are confident that we are perfectly positioned to benefit from this future shift.

We believe that we are the aspirational supermarket brand in the lower income markets, because of the value and quality we offer in world-class stores. However, we seek to be the supermarket of choice for all South Africans, with a format to suit every shopper and every shopping occasion. There is therefore no reason to believe that we cannot be the retailer of choice in the LSM 8 – 10 market. Our incredible success with PnP on Nicol has shown that we can serve this market as well as, if not better than, our major competitors and as such, we intend to roll out the innovations implemented at Nicol into other strategically placed stores.

Pick n Pay owned stores (corporate) – during the year we opened 9 new supermarkets, closed 3 and converted 5 franchise supermarkets to corporate stores. In addition, we opened 34 liquor stores and 15 clothing stores. We intend to open at least 9 new supermarkets next year, 20 liquor stores and 15 clothing stores.

Pick n Pay franchised stores – during the year we opened 9 new supermarkets, closed 5 supermarkets and converted 5 franchise supermarkets to corporate stores. In addition, we opened 19 liquor stores, 2 clothing stores and closed 2 mini markets during the year. We intend to open at least 7 new supermarkets and 15 liquor stores in South Africa next year.

Boxer – we opened 10 Boxer superstores during the year, closed 4 and opened 8 new Punch stores. Boxer also opened 4 liquor stores and 2 Boxer Builds. We intend to open 22 superstores, 9 Punch supermarkets, 4 Boxer Builds and 10 liquor stores next year.

Africa – we continue our steady growth into southern Africa and at 29 February 2012, the total number of stores outside South Africa (both owned and franchised) was 94. We opened 3 new stores in Zambia during the year, all of which are trading well, and we continue to explore opportunities in the region. We also opened our first store in Mozambique and our first two stores in Mauritius. We have three openings planned for 2013 (excluding TM Supermarkets in Zimbabwe), in Mozambique, Zambia and Mauritius.

In February 2012 we subscribed for additional share capital equal to a 24% stake in our associate TM Supermarkets in Zimbabwe for R102.5 million (US$13 million), taking our total investment to 49%. The business is currently incurring losses, our share being R1.9 million for the year. However, we are confident of its future prospects and are looking forward to playing a part in growing the business in Zimbabwe.

ENVIRONMENTAL AND SOCIAL SUSTAINABILITY

Environmental and social sustainability is at the very core of our business, fully incorporated into our strategy and daily operations. The 2012 financial year saw our continued commitment in all areas of environmental sustainability and social responsibility, with a particular focus on enterprise development. Pick n Pay has a long history of supporting and developing small suppliers, assisting them to become long-term suppliers to Pick n Pay and other retailers.

With our small business incubator and Pick n Pay Franchise Academy we have had great success in developing successful entrepreneurs, and as such have contributed significantly to the economic sustainability of the communities in which we operate.

In addition, we continued our commitment to conserving our environment and reducing our carbon footprint. An example of this is our new Western Cape distribution centre, which incorporates a number of green innovations such as some off-grid power generation, daylight harvesting, rainwater collection and motion sensor lighting.

In the 2012 financial year we were once again recognised by the Sunday Times as South Africa’s leading company in the promotion of green awareness, and received recognition from Eskom for innovation in energy savings.

LOOKING FORWARD

Despite a challenging year, our improved performance over the last six months gives us confidence in the work that we have done in repositioning the Group for the future, and gives us good momentum into the 2013 financial year. A significant portion of our transformation strategy has now been implemented. Although we acknowledge that there is still much work to be done in seeing the strategy through to completion, we believe we have reached the point where the benefits of the changes to date are starting to be felt and are expected to accelerate in the year ahead.

We are operating in an uncertain economic climate and a highly competitive industry, and are still faced with all the risks and challenges of a Group undergoing great change, and as such it is difficult to predict with any certainty the timing and strength of our recovery. However, we are absolutely convinced that the transformation work undertaken to date has been crucial in positioning the Group for a successful and sustainable future.