Strategic focus
2013 was a turning point for Pick n Pay. Costs were increasing, profits were falling and much of the focus of the business was directed to the challenge of centralising its operations, including its commercial buying, distribution, information technology and administration. The Group required new and decisive leadership. Richard Brasher was appointed as Chief Executive Officer at the beginning of the 2014 financial year, and together with his senior management team, set to work formulating a strategic plan for the business.
In devising the strategic long-term recovery plan, the team recognised that a return to sustainable long-term growth could not be achieved overnight. Pick n Pay’s recovery plan sets out to address the fundamentals of the business, bringing stability to its decisions, strengthening its operations, improving its competitiveness and determining a clear route to sustainable long-term growth. It is organised into three stages:
Stage 1 Stabilise the business
Stage 2 Changing the trajectory
Stage 3 Sustainable long-term growth
Stage 1 Stabilise the business
The immediate priority in this stage was to stabilise the core Pick n Pay business. This stage focused on:
- Stringent financial control and a resolute focus on reducing both capital and operating spend.
- Tightening working capital management, strengthening cash balances and reducing the need for debt.
- Developing and implementing a clear plan on centralisation, in particular of commercial buying, replenishment and supply chain.
- Improving the store economic model, driving efficiency and higher productivity throughout the business.
- Strengthening the senior management team to deliver these priorities.
A further priority in Stage 1 was to lay strong foundations for the second stage – changing the trajectory of the Group’s growth, efficiency and customer offer. Steps involved in laying this foundation, delivered over the past two years, have included:
- Action to improve the quality of the store portfolio by closing unprofitable stores and beginning the process of refitting and modernising hypermarkets.
- Developing a strong plan for future space growth which takes advantage of the improved operating model including store efficiency gains, an increasingly centralised supply chain and improved labour productivity.
- Establishing and pursuing an ambition to deliver every product, every day to stores on a short lead time.
- Customer innovation, particularly on pricing and promotions, through initiatives such as Brand Match, and the strengthening of other parts of the customer offer including Smart Shopper.
The end of the 2015 financial year marks the completion of Stage 1 of our strategic long-term recovery plan.
Pick n Pay is a more stable business than it was two years ago. We have achieved the goals we set ourselves – having improved gross profit and trading profit margins and strengthened the balance sheet with more cash and less debt. As this report makes clear, our improved financial performance has enabled us to invest more not only in our business but also in our people and in our communities.
The business is well positioned for growth and is ready for Stage 2 of the strategic long-term recovery plan.
Stage 2 Changing the trajectory
Stage 2 of the strategic long-term recovery plan is organised around seven business acceleration pillars. These pillars represent seven material growth opportunities that can substantively affect the Group’s ability to create value over the short, medium and long term. The pillars provide the senior management team with clear priorities, objectives and lines of accountability.
Business acceleration pillars
Better for customers
A flexible and
winning estate
Efficient and
effective operations
Every product, every day
A winning team
Boxer - a national brand
Rest of Africa –
second engine of growth
The opportunity to create value
Continued innovation, better availability, improved fresh produce and private label and investment in pricing and promotions
Strong new space and refit programme, leveraging an improved operating model
Unlock savings in operating costs and improve customer service
Centralise supply chain with every product, delivered every day
The right skills and the right team throughout the organisation
A national brand securing value leadership and double digit annual sales growth
A second engine of growth, extending the customer offer to markets outside South Africa
Business acceleration pillar: Better for customers
Pick n Pay’s plan recognises that its recovery must be customer-led as well as cost-driven. We will continue to innovate, improving our service and offer to our customers in store. Improvements in cost control and efficiency in Stage 1 provide a solid foundation for Stage 2, in which a leaner, more efficient business will create more value to invest in the customer proposition.
Achievements in 2015:
Provide solid foundation for growth
- We gave more value to customers through sharper pricing and deeper promotions and strengthened our in-store execution of promotional offers. This includes our successful “Super 6” campaign which provides customers with high-quality fruit and vegetable staples at competitive prices.
- We launched Brand Match which is convincing customers that they do not need to shop around for lower prices and this is building confidence in the competitiveness of Pick n Pay’s pricing.
- We have provided more to our customers adding more value-added benefits to our Smart Shopper programme and saw the number of vouchers redeemed increase by 68% over the year.
- We launched Mobile Money in partnership with MTN, which provides more than 1 million customers access to free money transfers and other low-cost banking services from their mobile phones.
- We now accept Buy Aid into all our stores. This has attracted more customers to Pick n Pay.
Focus areas for Stage 2 include:
- Better on-shelf availability – We will harness the benefits of central distribution and the progress achieved across our supply chain to deliver to our stores the products they need, at the right time.
- Sharper prices and promotions – We will continue to innovate on price and promotions, always looking to improve the value and relevance of our offer to customers. We will continue to strengthen our Smart Shopper programme, building on its strong foundation as South Africa’s favourite loyalty programme.
- We will invest in fresh, especially produce – We will focus on improving our range of fresh and perishable produce, including convenience meals. Customers are shopping more frequently – often daily – for fresh and healthy produce. We will strengthen our offer to meet their needs.
- Private label – Through a strategic partnership with Daymon Worldwide we will expand our range of private label products. This will not only offer our customers more value and more choice but will enable Pick n Pay to support even more small local suppliers by giving them access to a national market.
- Continued innovation through category reviews – We will improve the relevance and consistency of our ranges to better appeal to the customers we serve across different communities.
- Customer service – We will focus on offering our customers a quick, courteous and consistent frontline experience.
Material risks |
How we are mitigating the risks |
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Non-delivery from suppliers or breakdowns in our internal distribution processes cause out-of-stocks for customers |
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We don’t stock the products |
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We charge too much |
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Unsafe food which could cause |
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Business acceleration pillar: A flexible and winning estate
Pick n Pay is a much loved brand with an extensive retail presence in South Africa and southern Africa. However, there are many communities across the country where we are under-represented, particularly outside urban centres. There is opportunity for Pick n Pay to extend its reach across the countries it trades in, including through smaller stores which focus on the growing demand for convenience.
Achievements in 2015:
Provide solid foundation for growth
- We closed 40 under-performing stores over the last two years (26 in 2014 and a further 14 in 2015) to improve the quality and underlying profitability of our estate.
- The Group added 127 stores across all formats in the 2015 financial period.
- We began a substantial refurbishment programme in the second half of the 2015 financial year, refitting four Hypermarkets and 16 supermarkets over the period.
- We introduced our smaller Pick n Pay Local format into four new convenience sites, catering specifically for the unique needs of those neighbourhoods. These stores are not more than 1 000m2 in size and leverage off both our expanded central supply chain and our lower-cost operating model.
- We doubled the number of Express stores, opening 25 stores over the year.
- Pick n Pay Online once again delivered strong double-digit growth during 2015, adding 40 000 new customers. We also developed a dedicated picking warehouse at our Brackenfell Hypermarket for our online business. The warehouse has substantially broadened the product range available to online shoppers and significantly improved availability.
Focus areas for Stage 2 include:
- Accelerate our opening programme – We will take advantage of our new lower-cost operating model to bring more Pick n Pay and Boxer stores to communities where we are under-represented.
- Grow our convenience offer – Our customers have demonstrated a growing demand for more convenience and smaller neighbourhood stores – and we will meet this need by growing our Local and Express formats.
- More franchise stores – We will continue to grow our franchise business, for example the roll-out of Pick n Pay Express stores on BP forecourts. Our franchisees are strategic partners to Pick n Pay. Franchisees give tremendous reach to our footprint and we benefit from their retail experience and their commitment to the Pick n Pay brand.
- Double the number of store refurbishments – We will improve the quality of our estate by accelerating the refurbishment programme which began in 2015. We will target key stores with refurbishments that add value to the customer and deliver improved turnover growth and return on investment.
- Accelerate our online business – We will continue to respond to the growing need for online retail by investing and innovating in systems and our offer.
Material risks |
How we are mitigating the risks |
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We miss out on the best locations for new stores |
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We open or refurbish stores that do not deliver sustainable returns |
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Loss of existing franchisees or new franchise opportunities to competing retailers |
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Business acceleration pillar: Efficient and effective operations
By improving the efficiency and underlying profitability of the business, we can offer our customers better value and serve them more effectively.
Achievements in 2015:
Provide solid foundation for growth
- The Group established its specialist Retail Office in September 2014 to drive efficient and effective processes across all store formats. In a short space of time the team delivered substantial cost savings in participating stores and achieved greater efficiency in back door receiving and in-store replenishment.
- The increase in like-for-like employee costs was contained at 3.5%, notwithstanding a higher wage rate increase and an additional R67.3 million incurred in respect of the new employee share incentive scheme. This illustrates tangible progress in improving labour productivity and efficiency through the centralisation and simplification of business processes and systems.
- The increase in like-for-like trading expenses was contained at 3.8% with a 30 basis points improvement in trading profit margin from 1.6% to 1.9% in 2015 (from a low of 1.3% in the 2013 comparable financial period).
- More efficient use of space in new stores, with new stores achieving a much higher ratio of trading space to back-up areas, compared with existing stores.
- Our refreshed Hypermarkets provide a better offer on a reduced footprint, operate off a lower cost model – and we earn revenue from leasing the released space to third parties.
- Improved working capital management, particularly the management of inventory, led to stronger cash balances over the period and a repayment of R700 million of medium-term debt.
Focus areas for Stage 2 include:
- Less cost/more efficiency – We will continue to improve the efficiency of our business through the centralisation of supply, procurement and administration, the effective use of systems, the removal of duplication and the simplification of processes.
- Backdoor productivity – The acceleration of centralised supply means more deliveries from our central distribution centre and fewer direct deliveries from suppliers. This makes the process more efficient and accurate, cuts administration on the back door and enables us to shift focus and resources to the front of the store.
- Improved product flow and replenishment – Increased productivity at back door receiving will lead to improved product flow and a quicker and more effective in-store replenishment system.
- Sharper execution on sales floor and improved frontline service – Streamlined and simplified processes in-store, particularly in receiving and administration, allowing our staff to focus their efforts on the sales floor and tills on the frontline. We will provide our staff on the shop floor and frontline with the necessary technology and training to do their jobs effectively and efficiently.
Material risks |
How we are mitigating the risks |
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Disruption to trade as a result of loss of or damage to assets or stores |
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We fail to remove cost from the business |
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Interrupted electricity supply |
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Reliance on IT systems |
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Business acceleration pillar: Every product, every day
We aim to achieve our goal of every product delivered to stores, every day on a short lead time. The key to this will be an efficient and fully centralised procurement and distribution channel, driving more cost savings and productivity across the business. Our central supply chain is in its infancy, and while we are extremely pleased with the progress delivered to date – it has not been without challenges along the way. As an example, we experienced an unprotected labour strike at our Longmeadow Distribution Centre towards the end of the financial year. Risk management and mitigation processes were triggered and the situation was quickly resolved, however it impacted efficiency at the facility for a number of weeks and deliveries to stores in the Gauteng region.
Achievements in 2015:
Provide solid foundation for growth
- Doubled the capacity of the Philippi Distribution Centre in Cape Town with the implementation of a high-density pick tunnel.
- Rolled out the Enterprise Warehouse Management (EWM) SAP system which has worked effectively in Philippi, at the Longmeadow Distribution Centre in Gauteng, to improve operating efficiency at the facility.
- We worked closely with suppliers to accelerate the pace of centralisation and increased the level of central distribution by 11% pts, adding 90 suppliers to our supply chain channel.
- The Philippi Distribution Centre is successfully delivering every product, every day to all company-owned stores in the Western Cape on a 24-hour lead time. This is currently being introduced at Longmeadow in servicing the Gauteng region.
- On-shelf availability improved by 2.5% over the year, reducing the need for large back-up areas in stores.
Focus areas for Stage 2 include:
- More suppliers centralised – We are committed to accelerating the centralisation of supply and are working closely with suppliers in this regard. The supply of Pick n Pay branded stores is currently 45% centrally distributed; we aim to increase this to over 60% by the close of the 2016 financial year.
- Higher distribution centre productivity – We are focused on improving pick rates in our two main facilities, Philippi and Longmeadow, and in improving strike rates to stores.
- Focus on fresh supply chain – We have achieved the greatest progress to date in the central supply of groceries, with particular success from our Philippi distribution centre in the Western Cape. We plan to improve our distribution of fresh and perishable goods, with a particular focus on maintaining the cold chain and increasing produce shelf life.
- Fewer, more efficient deliveries – As we centralise more, our stores will benefit from a reduced number of direct-to-store deliveries from suppliers. Our distribution centre will send fewer trucks – but more frequently – with automatic green-light receiving.
- New distribution centre capacity – Philippi and Longmeadow provide us with sufficient supply chain capability in the Western Cape and Gauteng regions. We are now ready to explore opportunities to build our capacity in KwaZulu-Natal and the Eastern Cape.
Material risks |
How we are mitigating the risks |
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Loss of major suppliers and/or product ranges |
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Material damage to or loss of distribution centre, as a result of natural or other disaster and the subsequent impact on stores |
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Not maintaining an effective cold chain and its impact on the quality of fresh produce |
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Business acceleration pillar: A winning team
Pick n Pay is determined to create the most skilled and talented retail business in South Africa.
Achievements in 2015:
Provide solid foundation for growth
- We have strengthened the senior management team through both external appointments and internal promotions.
- We have implemented a new performance management system for senior management that established clear objectives and lines of accountability.
- We implemented a new employee share incentive scheme during the year – the forfeitable share plan – in order to reward performance and align the interests of senior management with those of shareholders.
- We improved our BBBEE performance from level 6 to level 4.
- Strong commitment to upskilling our employees, with a 16.7% increase in skills development and bursaries on the previous year.
Focus areas for Stage 2 include:
- Core skills training – We will continue with the many training programmes offered across the business, with a focus on core skills and how we can do things better, simpler and faster.
- Focus on customer service – The training that we provide will always keep the customer at its centre and will encourage our staff members to do better for customers every day.
- Performance management – We will roll out a performance management system to junior management levels, so that these employees are able to work towards clear and measurable key performance indicators, and are rewarded in a relevant and appropriate way for meeting those objectives.
- Better communications – We will strengthen our internal communications, equipping our staff to engage better with customers and other stakeholders.
- Diverse workforce – We will continue to build a diverse workforce that mirrors the customers and communities that we serve across the broad spectrum of the South African society and the other countries that we operate in. This will be a focus in all areas, including new appointments, promotions and skills training.
Material risks |
How we are mitigating the risks |
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We fail to attract and retain the right staff |
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Insufficient skills or experience across all employee demographics |
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An increasing cost of labour, without a commensurate increase in return |
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Labour strike |
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Business acceleration pillar: Boxer – a national brand
Our Boxer business has grown significantly in recent years, despite the challenging conditions facing the lower-income and more rural communities of South Africa and Swaziland. It offers a good range of high-quality produce and merchandise at affordable prices. We closed five under-performing Boxer stores during the year, and while it has strengthened the quality of the estate, it is never an easy decision to reach. Boxer has built a trusted brand in the communities it serves and we are confident of the opportunity the Group has to grow Boxer into a national brand.
Achievements in 2015:
Provide solid foundation for growth
- Grown the business in a competitive environment against the backdrop of exceedingly challenging market conditions, including strikes in the mining sector and civil protests surrounding the lack of service delivery from government. Boxer opened 14 new stores over the period, bringing the total to 189.
- Grown value-added services for customers, including the sale of lottery tickets, pre-paid electricity and bus tickets.
Focus areas for Stage 2 include:
- Sharper prices and promotions – Low prices are critical for Boxer customers and we will continue to do everything possible to bring increasing value to poorer communities. This includes expanding our range of fresh produce, particularly our butchery offer, to meet increasing demand.
- Accelerated new space growth – While having a presence in eight out of nine provinces across South Africa, Boxer is largely concentrated in KwaZulu-Natal and the Eastern Cape. We will grow this business nationally, supported by a more efficient operating model, leveraging off back-office synergies of the Group.
- Improved DC capacity – Boxer is currently a 100% direct-to-store delivery business. We will begin to explore the centralisation of its distribution channel and are well placed to provide distribution centre capability through the Group’s supply chain.
Material risks |
How we are mitigating the risks |
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Low-price environments erode margins to unsustainable levels |
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Store operations grow ahead of the capacity of systems and administrative support structures |
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Business acceleration pillar: Rest of Africa – a second engine of growth
Our operations outside South Africa are an important contributor to the Group. We have an established presence in Botswana, Lesotho, Namibia, Swaziland and Zambia and have a minority share in our associate TM Supermarkets in Zimbabwe. Our foreign operations contributed segmental revenue of just over R3.7 billion during the 2015 financial year. TM Supermarkets experienced a challenging trading year, against the backdrop of continued economic and political uncertainty, a deflationary trading environment and increased competition. We continue to support the business and are confident of its future prospects in the region. We will continue to look for profitable opportunities in other countries that offer political stability, economic growth, ease of business and the prospect of strategic scale.
Achievements in 2015:
Provide solid foundation for growth
- Segmental profits before tax of the Rest of Africa division are up 34.6% on last year, with some benefit from the closure of unsustainable businesses in Mauritius and Mozambique towards the end of last year.
- We have opened 12 new stores, eight in Namibia, two in Zambia and two in Zimbabwe.
- We continue to support our associate TM Supermarkets in Zimbabwe, opening new stores, undertaking a substantial refurbishment programme of all stores and rebranding a number of TM Supermarkets to trade under the Pick n Pay banner (today eight in total).
- We have registered a company in Ghana and are in the beginning stages of developing our business in the region.
Focus areas for Stage 2 include:
- Improve fresh offer in all markets – Our focus on fresh is not limited to our core retail business in South Africa, but on improving the offer across all stores and regions. We will work closely with local suppliers to provide us with the best quality produce each region has to offer.
- More efficient operations – The Group’s operating model has improved, becoming more cost effective and efficient. Our stores outside South Africa will benefit from these efficiencies and will leverage off this knowledge and systems. This includes providing on-the-ground management support to TM Supermarkets in Zimbabwe.
- More stores in Zambia and Zimbabwe – Despite challenging economic conditions, we are confident of the future prospects for Pick n Pay in these regions and will continue to improve existing stores and open new stores.
- First store in Ghana – We will open our first store in Ghana in calendar year 2016.
Material risks |
How we are mitigating the risks |
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Economic or political instability |
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Lack of understanding of local markets |
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Stage 3 Sustainable long-term growth
The successful completion of stages 1 and 2 of our strategic long-term recovery plan will deliver a business that is defined by the following characteristics:
- A track record of sales and profit growth
- Strong customer loyalty and advocacy
- Continuous innovation and improvement in stores and their offer
- An operating model which benchmarks internationally
- Collaborative and enduring relations with a diverse supplier base
- A clear growth strategy
- An employer of choice which delivers opportunity for all
- A resource-efficient business which is a positive force in the countries in which it trades
Pick n Pay will be in a strong position to deliver sustainable long-term growth and has the capability to explore additional engines of growth on the next stages of its journey.
The recovery and growth of Pick n Pay will be positive for all the communities we serve. Our planned capital spend over the next two years will inject around R5 billion into our local economies. This will create thousands of new jobs and give many more small and medium-sized suppliers the opportunity to partner with us and encourage other businesses to invest in the communities we are in. New stores will create access to safe, reliable and affordable food in previously underserved communities and will provide new employees with reliable income, healthcare and other benefits.
Our values of consumer sovereignty, business efficiency and doing good is good business have endured and continue to guide our progress, and as we grow so will our contribution to society.