chief executive officer’s report
Richard Brasher
The Group has undergone substantial change over the past five years and in particular since 2013. It is ready for Stage 2 of the journey – changing the trajectory of Pick n Pay – and is well positioned for sustainable long-term growth.
The end of the 2015 financial year marks a significant milestone in Pick n Pay’s strategic long-term recovery.
Two years ago the leadership team devised a turnaround plan comprising three parts:
Stage 1 – Stabilise the business
Stage 2 – Changing the trajectory
Stage 3 – Sustainable long-term growth
The first stage of this plan is now substantially complete, the business having reported strong profit growth over four consecutive reporting periods.
Greater stability has been achieved through strong financial control and working capital management, which resulted in consistently stronger cash balances throughout the year and enabled the business to repay a significant proportion of its debt. Operating efficiency has improved with the business becoming increasingly effective in managing its costs. We have improved both our gross profit margin and our trading profit margin. Our headline earnings per share increased 28.0% on the previous year.
The second stage of the Pick n Pay recovery plan – changing the trajectory – will deliver a better business for customers, further improvements in operating efficiency, a dynamic approach to growth and further strengthening of the balance sheet and financial performance. Strong foundations for this stage have already been laid over the last two years. Some of these have required us to take tough decisions including the closure of over 40 unprofitable stores over the past two years and beginning the process of refitting and modernising hypermarkets and larger supermarkets. In this period we have taken a prudent approach to expansion, using the time to develop a strong plan intended to ensure that all new space will drive strong and sustainable returns. These various steps have impacted the short-term performance of our business but have strengthened our capacity to deliver in the longer term.
A year ago I made a commitment to Pick n Pay shareholders that I would organise, focus and motivate my team around a clear plan and that this plan would have the customer at its heart. I believe we have made sound progress in this regard. We have made further progress in centralising our supply chain, on improving replenishment and on-shelf availability. We have modernised our economic model to make our stores more efficient and more responsive to customers. We have innovated in-store, improving our range and offer.
There is much more to be achieved as we shift our focus from stabilising the business to delivering sales-led growth but the steps we have taken will stand us in good stead. Our team is organised around our plan and we are focused and energetic.
Better for customers
Pick n Pay remains determined to get better for customers. This means giving our customers more of what they want, where they want it and at lower prices. It means offering quality, value, convenience and innovation. We have sharpened our pricing and have strengthened our promotional offer. Our Brand Match campaign has been well received by customers. The high percentage of low/zero coupon values has built confidence in the competitiveness of Pick n Pay’s pricing and is convincing customers that they do not need to shop around for lower prices.
Smart Shopper, South Africa’s favourite loyalty programme, continues to grow, and is a key differentiator for Pick n Pay. We are gaining valuable insight from Smart Shopper to personalise and improve our promotions, with the number of vouchers redeemed increasing by 68% over the year to 3.4 million. We have also worked with key partners to provide additional value-added benefits to make Smart Shopper even more attractive to our customers.
The Group has worked tirelessly with its suppliers to improve product availability for customers, and to improve the quality and range of merchandise on our shelves, particularly fresh produce. We have undertaken in-depth category reviews over the course of the year to make our product ranges more relevant to customers and more consistent from store to store.
During the year we entered into a strategic partnership with Daymon Worldwide to help us grow our private label offering. We believe that there is an opportunity to grow private label at Pick n Pay, not only providing our customers with more choice but enabling Pick n Pay to support even more local suppliers, including black- and women-owned businesses.
Value-added services are a growing part of our business, with commission and other income from these services up more than 100% on last year. Pick n Pay provides our customers with access to financial services (including our successful Mobile Money partnership with MTN), third-party bill payments, gift cards, pre-paid electricity, lotto and travel and event tickets. We will continue to focus on this area, providing our customers with increased convenience and innovation.
A flexible and winning estate
At 1 March 2015, the Group store portfolio comprised 1 189 stores and 2.2 million square metres (excluding its investment in TM Supermarkets in Zimbabwe). Pick n Pay opened 127 stores during the year across all Pick n Pay and Boxer formats, including 36 new supermarkets, and closed 14 under-performing stores. The 113 net new stores added 5.2% to total space.
As mentioned before, the Group followed a cautious approach to new space growth over the period. We are determined only to grow new space where we are confident that doing so will deliver strong and sustainable returns. To this end, the Group has developed a plan for future space growth which takes advantage of our improved operating model, leveraging improved store efficiencies, an increasingly centralised supply chain and improved labour productivity. The lowered cost of operations enables the Group to make more efficient use of existing space, to the pool of potential sites for new stores, and respond dynamically to the growing demand for convenience and local neighbourhood stores.
Pick n Pay has a vision to be the retailer for every South African and that means bringing Pick n Pay and Boxer stores to more communities. We are now in a better position to do so, ensuring that each new store adds real value to customers and a sustainable return for shareholders.
We have 20 Hypermarkets which contribute meaningfully to Group turnover and have embarked on a plan to modernise each of these for customers. Four Hypermarkets have undergone, or are currently undergoing, refurbishment. They are inevitably subject to a negative turnover impact during refurbishment, but are showing strong sales growth and improved trading densities thereafter. As an example, our new and improved Brackenfell Hypermarket in the Western Cape has halved in size, now houses both the liquor store and pharmacy on-site, enjoys a refreshed range of clothing and general merchandise and delivers a significantly improved turnover per square metre at a materially reduced occupancy cost.
Pick n Pay continues to develop as a multi-format, omni-channel business, and is excited by the growth delivered by our smaller format stores, which include Local, clothing, liquor and Express. Our online business once again delivered strong double-digit turnover growth, adding another 40 000 new customers over the course of the year. The online offer in the Western Cape has been expanded through the establishment of a dedicated online picking warehouse at our refurbished Brackenfell Hypermarket.
Our franchise stores remain an integral part of Pick n Pay and continue to play a key role in our strategic long-term plan. Our franchisees are strong representatives of our Pick n Pay brand and we benefit from having these committed, capable retailers serving our customers. Our plan to make Pick n Pay better for our customers will make Pick n Pay better for our franchisees too.
Efficient and effective operations
In September 2014 the Group established its Retail Office – a specialist team tasked with driving an efficient and effective operating model across all store formats. In a short space of time the team has delivered substantial cost savings in participating stores, demonstrating that we can successfully operate a more efficient store on a lean cost base. The team has also co-ordinated and delivered improvements in back-door receiving and in-store replenishment and achieved strong savings on waste and shrink. A well-run, cost-effective store unlocks value for further investment in the customer offer. Simple and efficient processes enable stores to focus fewer staff on receiving goods at the back door and more staff dedicated to customers on the shop floor.
Every product, every day
In the course of the 2015 financial year, the Group doubled the capacity of our supply chain capability in the Western Cape by implementing a high-density pick tunnel in our Philippi Distribution Centre. It also rolled out the Enterprise Warehouse Management (EWM) SAP warehousing system at the Longmeadow Distribution Centre in Gauteng, which will improve operating efficiency at the facility. Pick n Pay is working closely with suppliers to accelerate the pace of centralisation, adding 90 suppliers during the year and increasing the level of central supply by 11% pts.
Our Philippi Distribution Centre is successfully delivering every product, every day to all corporate stores in the Western Cape, on a 24-hour lead time. This arrangement is currently being introduced at Longmeadow in servicing the Gauteng region.
These operational advances, together with our automated forecast and replenishment system, have resulted in improvements in on-shelf stock availability of 2.5%, while reducing the need for large back-up storage areas in stores.
A winning team
We have strengthened our senior management team over the last year through key internal and external appointments. We have also said goodbye to two executives, Isaac Motaung and Neal Quirk, who have together given exemplary service to Pick n Pay over many decades. I want to thank them personally for their contributions to building a great business, and wish them long and happy retirements. We have introduced new performance review and management systems for senior managers and established clear objectives and lines of accountability.
We are committed to building a high-performance team of well-managed, trained and skilled employees who are empowered to build careers at Pick n Pay and are motivated to contribute to the success of the business. Reflecting our commitment to empowering our people, this year our investments in skills training and bursaries is up 16.7% on that of last year. We are determined to be an organisation that fairly reflects the diversity of our country and the communities we serve. To this end we are encouraged by the improvement in our BBBEE score from level 6 to level 4 over the past 12 months.
Boxer – a national brand
Our Boxer business has grown significantly in recent years, despite the challenging conditions facing the poorer and more rural communities of South Africa and Swaziland. Boxer customers often face economic hardship, which has been exacerbated over the course of this year by the strikes in the platinum sector, civil protests over the lack of basic service delivery and rising unemployment. The Boxer business operates a lean and efficient economic model, offering a compelling range of high-quality produce and merchandise at affordable prices. We are confident of the opportunity the Group has to grow Boxer into a national brand, an objective that forms a key part of our future growth strategy. We will harness the synergies between the Pick n Pay and Boxer businesses and, wherever appropriate, Pick n Pay will provide the systems and supply chain support that Boxer needs to grow.
Rest of Africa – second engine of growth
Our operations outside South Africa continue to deliver good growth, with segmental revenue up 16.6% in constant currency terms, notwithstanding the closure of our franchise operations in Mozambique and Mauritius last year. We continue to expand and improve our operations outside South Africa, opening stores in Namibia, Zambia and Zimbabwe over the year. TM Supermarkets, the Group’s associate in Zimbabwe, has experienced a challenging trading period, feeling the combined pressures of a deflationary trading environment, increasing competition and continued economic and political uncertainty in the region. TM continued with its sizeable store refit programme over the year, with the refurbishment of four TM Supermarkets and rebranding a further three stores to the Pick n Pay brand.
Markets outside South Africa remain a potential second engine of growth for Pick n Pay. We plan to strengthen our footprint in existing territories and will look for profitable opportunities in other countries that offer political stability, economic growth, ease of business and the prospect of strategic scale – with partners who share our vision and our values. We are confident of the prospects for growth into Ghana and will open our first store in that country in 2016.
More to come – the next stage in the strategic journey
The Group has changed for the better over the past two years. By improving the efficiency and underlying profitability of the business we have been able to do more for all our stakeholders. Pick n Pay is ready for the second stage of our journey – changing the trajectory – and is well-positioned for sustainable, long-term growth. We are determined to create many more opportunities for individuals and suppliers to meet their aspirations as employees and partners of our business while doing more good for the communities in which we operate.
I want to thank the Pick n Pay team who have all worked extremely hard through this first stage of our strategic plan, and who continue to serve the business with a passion that is unique to the Pick n Pay brand. I also wish to thank the Chairman and my Board colleagues. Their advice over the past two years has been invaluable. As a team we are now ready for the second stage of our plan.
Richard Brasher
Chief Executive Officer
Cape Town
20 April 2015