Chairman's report

Since I became Chairman four years ago, my focus has been to return Pick n Pay to the basic principles and values on which it was founded.

By a return to basic principles, I mean a recommitment to the retailing philosophy that has always differentiated Pick n Pay from its competitors and has ensured our ability to run an ethical, responsible and profitable company. I am satisfied that the Group’s three core legacies have remained intact as the building blocks of our turnaround strategy – the values of consumer sovereignty, the maxim that “doing good is good business” and our commitment to business efficiency.

In recent years, every part of our business has been exhaustively and honestly reviewed. Over the last year, under the able guidance of our CEO Richard Brasher and his team, there is not one area of the Group that was not examined and improved.

On consumer sovereignty, I am encouraged that Pick n Pay is reaching more customers in more communities, and that we are doing so across social, income and cultural bands. We are improving our products and our service, sharpening our availability and extending the benefit of our smart shopper loyalty programme. Behind the scenes, we are becoming more efficient as a business. By becoming leaner, we are able to offer even better value to customers.

From its foundation, Pick n Pay has always understood that customers have aspirations beyond their everyday needs – to build better communities and a stronger society. This explains our maxim that “doing good is good business”. I am pleased to report progress in a number of areas. Through cooperation with the Ackerman Pick n Pay foundations, we have taken a leading role in mentoring, encouraging and enabling small-scale emerging farmers to build businesses and become suppliers to our stores. This work is crucial in building social and economic capital by bringing more black-owned and small businesses into the economy through the Pick n Pay supply chain. We want to see this work grow and strengthen in the coming years.

In keeping with our commitment to initiatives that ensure food security, we have paid particular attention to providing those most in need with easier access to affordable, healthy food and clothing. During the year under review, Pick n Pay donated more than R15 million worth of food to FoodBank South Africa and established 113 community food gardens through the Ackerman Pick n Pay foundation.

During the year under review, a major focus has been on consolidating Pick n Pay’s existing sustainability strategy and deepening its impact on the organisation.

Our business has in recent years established a strong leadership position on climate change in southern Africa. I was delighted that Pick n Pay’s climate change strategy was assessed as the foremost among businesses in Africa by the globally renowned Carbon Disclosure Project. This work is another example of how doing good is good business. As well as setting an example for the fight against climate change, our carbon reduction plan has helped us to reduce energy use per square metre in our stores by 30% since 2008. This has saved Pick n Pay R508 million over this period. We have new corporate stores that are 20% to 40% more energy efficient than stores opened six years ago. Moreover, it makes us a more energy-resilient business and contributes to the national need to save energy at a time when energy supply is under sustained pressure.

Another area in which Pick n Pay has shown significant corporate leadership is through our sustainable seafood partnership with World Wide Fund For Nature South Africa (WWF-SA). As core funder and sustainable seafood partner of the WWF-SA, we are well on track towards meeting our commitment that by the end of 2015 Pick n Pay will only stock seafood which is sustainably sourced. Underlying this, we will also ensure that by the end of 2015, all our seafood products are traceable to their origins and are labelled with their common name, scientific name, origin and method of caught. Initiatives such as this help to empower consumers who want to make sustainable choices. WWF-SA have commented that their sustainable seafood partnership with Pick n Pay is a model of collaboration which is cited globally for its impact and excellence.

There are, of course, areas where we recognise room for improvement. These include improving the rigour of non-financial data across the business, in order to do full justice to our environmental reporting obligations, increasing awareness of sustainability issues at shop floor and category buyer level, and exploring innovative ways of supporting small- and black-owned businesses while retaining our high standards of quality and value for money.

In this as in other areas we recognise that we are on a journey. In the spirit of that journey it has nonetheless been pleasing to see Pick n Pay recognised by customers and other stakeholders over the past year in a number of awards:

During the past year, I have again written about the role of the family controlled enterprise. Numerous academic and other studies across the world have found that many family controlled enterprises share common strengths: stability of control is combined with strong governance, a dynamic approach to risk and investment, and decision-making focused on the long-term interests of the business and its stakeholders rather than immediate returns and short-term benefit. Pick n Pay has gone through difficult times in recent years. We have had to take tough decisions. We are now turning the corner and building momentum on our improvement plan. Through this period and in the years to come, I believe we will continue to demonstrate that family control is a strength – in particular providing stability and taking the long view so that necessary change is identified and acted upon.

Pick n Pay remains committed to the best global governance standards. However, I remain concerned about the tendency towards ever-greater prescriptiveness and the resulting additional bureaucratic and other burdens on business.

I have also spoken and written over the past year about the burden of unjustified bank interchange fees on credit, hybrid and debit card transactions. These fees are largely hidden from the consumer, and they bear disproportionately hard on those with low incomes. Getting them reduced has been a hard fight, and we have been determined to support the Reserve Bank’s review of these fees. We were therefore pleased that the Reserve Bank acted earlier this year to reduce these fees in some circumstances from January 2015. There is much further to go in this and other areas, and Pick n Pay will continue to demonstrate leadership to secure better value for our customers.

It was pleasing to see the Competition Commission’s long-running inquiry into aspects of the retail industry finally conclude with no adverse findings against the sector. This has been a costly and lengthy inquiry, and throughout it Pick n Pay has been absolutely determined to uphold our belief that our sector is highly competitive, operates fairly, and works in the interest of consumers. I want to express my thanks to all of my colleagues in Pick n Pay who have worked hard to help deliver this appropriate outcome.

Over the past year we have strengthened our senior management team, sharpened our talent management and modernised our long-term incentives for senior management. On the latter, I am grateful to our shareholders for approving our new share incentive plan, the Pick n Pay Stores Limited Forfeitable Share Plan (FSP). The plan adopts global best practice both by linking awards to clear achievement of defined targets, and by awarding performance shares rather than share options. Under the scheme, awards will accurately reflect the management performance of the business, and the scheme will help us to retain within the Company those individuals who are key to its performance and improvement.

We were delighted that, earlier this year, shareholders elected three new non-executive directors to our Board: Audrey Mothupi, David Friedland and John Gildersleeve. Each of these individuals brings to Pick n Pay huge expertise and experience, gained in different professions and sectors, both domestically and internationally. I welcome them to the Board and am absolutely confident that they will not only strengthen our corporate governance but significantly enhance our decision-making capability.

More widely, although the Group can look back on a year of encouraging progress, I remain concerned about the growing economic headwinds and the impact they are having not only on business but on consumers. Companies and individuals are bearing the brunt of higher energy, utility and other costs. Interest rates are on an upward trend, and the rand has weakened significantly against other currencies. Business and consumer confidence is down. Economic growth has also slowed, meaning that insufficient new jobs are being created to make a major dent in our very high levels of unemployment.

At such times, we all need to work together – to mitigate the impact on our customers, and to put in place building blocks for a brighter future. In this context, I was pleased that, over the past year, Pick n Pay was able to hold its prices for customers below CPI, and create around 5 000 new jobs and careers in our new owned and franchise stores. I believe that business can play a hugely positive role in the economy and in society. But it can best do this where it is trusted by government and others as a partner and an enabler, rather than simply as a source of revenue and a target for legislation. Let us hope that this election year ushers in a period of closer collaboration between the public and private sectors.

In February 2014, the Board resolved unanimously that Raymond Ackerman be appointed as Honorary Life President of the Company, in recognition of his lifetime of service to our business. I am sure that all of our staff, customers, shareholders and wider stakeholders will applaud this as a small but fitting tribute to the founder of Pick n Pay. We would also like to congratulate Raymond Ackerman on being awarded the Order of the Baobab (Silver) by the President in April 2014 for his services to South Africa.

In conclusion, I wish to thank Richard Brasher and his senior team for their leadership over the past year. I have had the pleasure of experiencing at first hand the intelligence, skill and energy which Richard has brought to our business. Like Richard, I know that much hard work remains to be done. But our progress is encouraging and I for one am greatly looking forward to the next stage of our journey.

Gareth Ackerman
Chairman

Cape Town
14 April 2014