Strategy update

 

Strategic priority: Revolutionise Pick n Pay’s product offer

During the past 12 months we have invested considerable time and resources in building a single specialised category buying division. Prior to the establishment of this division, Pick n Pay’s sourcing activities were distributed across the operating regions. This led to fragmentation of the Group’s buying scale, with each buyer having a wide range of products to source. Our new specialised category buying division is made up of category teams each of which is responsible for the end-to-end profitability of a specific product category. They are tasked with developing a product range that meets all customer needs, sourcing those products at the lowest possible cost, constructing shelf layouts that help customers find what they are looking for easily, building a promotional plan that generates customer excitement, increased volumes and higher margins, and ensuring that Pick n Pay’s prices remain highly competitive. Included in their responsibilities is the task of improving our Pick n Pay branded offer. Our own brand portfolio of products now makes up 15% of our grocery sales. It is a key source of differentiation for us.

As this division beds down we will see a vast improvement in the quality, choice and value of the products we offer to our customers.

Additionally we are focusing heavily on creating clear points of differentiation in fresh produce and meat. We have made significant improvements in recent years but we still have substantial scope to improve quality, freshness and range in these key categories, while minimising operating cost and wastage. We will be reviewing every part of the supply chain for fresh foods over the coming 12 months.

Strategic priority: Build a cost-effective replenishment system

Managing the flow of product to our stores in the most cost-effective manner is critical if we are to ensure that the product is available for the customer to buy at the right time, in the right place and at the right cost.

In 2007 we began transitioning from a direct-to-store delivery model to a centralised model where suppliers deliver to our own distribution centres and we consolidate the product and deliver to our stores. This results in a lower cost distribution model as fewer trucks travel fewer kilometres, while also enabling our stores to deal with much less complexity. Ultimately each store will receive fewer than five deliveries per day rather than, in some instances, more than 60. We will also be able to hold less stock in our stores.

Putting this model in place constitutes a major transformation of the business. We need to invest in distribution centres and build the capability to manage the flow of produce efficiently, which requires advanced systems and highly skilled personnel. We also need to develop the relationships with our suppliers so that we can minimise the total system cost of the supply chain and reinvest the savings in our product offer.

We have made significant progress in our operating regions served by the Longmeadow distribution centre in Johannesburg. This facility serves more than 300 stores and frequently delivers 1.6 million cases of product per week. We opened our new distribution centre in Cape Town in May 2012. Once this is fully operational, 50% of our grocery volume will be centralised. Further distribution centres will be opened in Durban and Johannesburg in the next two to three years.

Work has also begun on improving our fresh foods, frozen foods, and general merchandise distribution networks.

Strategic priority: Deliver best in-market shopping experience with lean efficiency

All elements of our strategy come to fruition in our stores. For us to serve our customer better, we need to improve how we support our store personnel to focus on those elements that really matter at the front-line. Through the other components of our strategy, we are putting in place specialists in marketing, category buying and replenishment. This will reduce the administrative strain of the stores significantly as they will be able to rely on specialised support structures to provide the right product to the store at the right time. Simplifying the store processes across the business will free up staff to do their jobs better and more efficiently leading to improved customer service and reduced costs.

Over the course of the next financial year, our store teams will be working hard to design the new ways of working which will be piloted before rolling-out.

In addition, our Goods Not for Resale (“GNFR”) team is working hard to minimise the cost to procure products and services that we do not on-sell to our customers: examples include cleaning and security services, trolleys and utilities. Since its establishment 18 months ago the team has saved over R100 million on an annualised basis.

Strategic priority: Sustain a thriving franchise business

Franchisees are a critical part of our growth strategy. Through the owner-managed model they deliver outstanding service to our customers while building their own businesses. This is a mutually beneficial relationship as we are able to roll stores out more rapidly and efficiently.

However, such a relationship needs to be constantly nurtured. The success of our franchise business depends on us offering talented entrepreneurs the best franchise model in the market. Over the past year we have done substantial work on continually improving the working relationship. We will be working through these plans with our franchisees over the coming months.

Strategic priority: Work as One Pick n Pay

Pick n Pay has grown as a decentralised business with largely independent operating regions working to grow sales and profit. This arrangement has served us well over more than 40 years. However, we have always recognised that business practices need to evolve with developments in technology and international best practice. We are in the midst of transforming to a model where stores are supported by a strong backbone of nationally based specialist functions. As we make this transition, the need to work cross-functionally is greater than ever before. We are determined to retain the entrepreneurial spirit that characterised our decentralised system while ensuring we capture the benefits of scale and specialisation.

To do so, we are investing heavily in leadership development and in engaging all parts of the business in the transformation. We can only succeed if we work as one.

STRATEGY IMPLEMENTATION

Over the past six months we have been pulling each element of our strategy into one overall transformation programme for the Group. This will ensure that trade-offs are managed appropriately, priorities are set and that the resources we have are devoted to those activities which will make the biggest difference to our customers.

MEASUREMENT AND KEY PERFORMANCE INDICATORS (KPIs)

Each of the strategic priorities we have identified has clear ownership within our Group Executive with equally clear KPIs.

Below is a chart outlining the relevant KPIs per each strategic priority. While there are always more measures one can add, these are the primary drivers of value in our business.

* Measure of advocacy based on customer service data

There is still some work to be done in bedding down all relevant and measurable KPIs across our strategic objectives. We hope to publish key performance targets and our performance against them in the future.

Underpinning Group strategy, and the individual strategic priorities detailed above is the fundamental principle of doing good is good business. We will continue to do good in all the communities in which we operate, with a particular focus on enterprise development, and we will continue to do good for our environment – as we focus on rolling-out green innovations in our stores, reducing our carbon footprint and reducing our waste to landfill.

KEY RISKS AND CHALLENGES

We see the biggest risks and challenges to the successful delivery of any strategy as:

All of these challenges are well within our control and we are doing everything in our power to make sure that we don’t fall down in these areas.

We are confident that the accurate and timely delivery of our strategy will make a marked difference to our customers’ experience in our stores, which will drive our sales volumes and enable us to improve the efficiency of our business. As we reinvest much of these benefits back into our business, we will continue to drive our sales volumes, leading to continued, consistent and sustainable returns to our shareholders.