Can Sean Summers plug the hole in PnP’s basket?

Ackerman children stay on the board but have fewer powers, while CEO Sean Summers has more freedom to implement sweeping changes, such as paying off debt in a back-to-basics plan.

Not enough investment into its stores and people, poor relationships with suppliers and franchisees, and high dividend payouts have pushed Pick n Pay into a hole that will be difficult — though not impossible — to crawl out of.

Some analysts believe flat sales, trading expenses and startling gross profit margin contraction point to systemic issues at Pick n Pay.

Even if it is not commercially insolvent, PnP is technically insolvent, and throwing more money at the problem will not be enough to see it back in the black.

Soon after he was reappointed, CEO Sean Summers admitted that the damage was largely self-inflicted. Rolling blackouts, crime and a stagnating economy didn’t help. Pick n Pay’s October interim results — showing a 97.5% loss in trading profit — were a reality check. 

“Pick n Pay has fallen out of love with its customers, its people and its suppliers. This is what lies ahead of us. This is why it’s so exciting. Because from here, we only go up,” Summers said.

It was far worse than he could have imagined. This week, it was clear PnP had plunged deeper into the abyss after its results reflected a R3.19-billion loss for the year. Group turnover rose by just 5.4% — saved by its Boxer stores. The discount retailer was up by 17.3% and the Pick n Pay Clothing standalone stores were up by 17%.

Gross profit margin declined from 19.6% to 18.1% and trading expenses rose by almost 12% as a result of higher bad debt and R307-million in employee restructuring costs. Trading profit fell by 87.4% to R385-million.

Jean Pierre Verster from Protea Capital Management said PnP had paid shareholders too much, instead of reinvesting in the business. “This is typical when you have a family that controls the company and wants to distribute as much cash as possible from the company. Pick n Pay was paying out too much capital.”

Ninety One assistant portfolio manager Achumile Mashalaba concurred. “PnP recently dropped the payout ratio, but most recently it was close to 70%. That links to the problem where you are underinvesting in your store base and in your supply chain, because you are paying this money out as dividends,” he said.

Strategic mistake

Since 2018 and with the exception of 2020, PnP has consistently paid shareholders higher dividends. In 2018, it paid 68.2% compared with Shoprite’s 51.6% and Clicks’ 62.3%. In 2021, PnP paid 78.4%, Shoprite 57.1% and Clicks 61.7%. In the 2023 financial year, the corresponding figures were 69.3%, 57.2% and 65%.

Verster adds that the Ekuseni strategy — to service PnP’s customers through three tailored banners, Pick n Pay, QualiSave and Boxer — was a strategic mistake. Before that, PnP’s biggest headache was its hypermarkets. With QualiSave, Summers’ predecessor Pieter Boone changed the range of the smaller stores, which didn’t work because it was too limited.

“Stores then went from being profitable to becoming loss-making. So instead of just having a problem with the hypermarkets, it now also had a problem with some of the smaller stores.”

The retailer has announced aggressive action to turn the ship around. It will recapitalise the business through a R4-billion rights offer, in which the Ackerman family relinquish their majority stake and hope to raise between R6-billion and R8-billion from Boxer’s listing on the JSE later this year. 

Gareth Ackerman will step down as chairperson. The Ackerman family are following their rights and have also committed R1-billion towards the recapitalisation, and the three Ackerman children — Gareth, Suzanne and Jonathan — will remain on the board, but no longer nominate the chair, CEO and chief financial officer.

Summers has more freedom to implement management’s sweeping changes, which include closing the loss-making stores, scrapping the QualiSave brand and converting them back to PnP stores, and paying off debt as part of a “back-to-basics” plan.

It’s going to be painful. Mashalaba said Shoprite had painted PnP into a tight corner because it had focused on South Africa, where it invested billions in stores. “It’s made it extremely tough for other competitors because shoppers don’t really have a reason to shop [elsewhere] any more.”

PnP’s sales growth numbers of -2% were staggeringly low, he said. “Generally, food retailers benefit from higher inflation because it is supposed to add to their top line. It speaks to a really struggling business.”

Broken relationships

PnP also has to fix broken relationships with franchisees. Summers said franchisees had been brought back into the fold. “I can say without any shadow of a doubt that at the moment, our relationships with franchisees in the main are better than they’ve been for a long time.”

Its fraught relationships with suppliers was another sticking point that affected PnP’s promotional ability. Mashalaba said the turnaround strategy was a good way to ensure PnP’s survival, but the retailer would look different in future. “It will be a smaller business. The cash injection will allow them to pay off their debt and also reinvest into the store offering. It won’t be the old PnP as we know it.”

Having about R12-billion in the kitty will make a big difference, but it will be at least two years before PnP breaks even and three years before it turns a profit.

It’s not just a case of fixing the balance sheet: PnP’s problems are bigger than just debt. While it has been struggling and focused internally, Shoprite has been improving its footprint and its offering, especially in areas like meat, bakery and fresh produce, and Spar has improved its fresh and ready-meal offerings, Verster said.

“Many customers switched from PnP to Checkers or Spar. Pick n Pay has a lot to fix, and the jury is still out on whether they can fix the business.”

Customers have also changed. No longer doing “big shops” at the hypermarket, they’re time-poor and opting for convenience.

Pick n Pay is highly leveraged and has identified 194 stores that are underperforming — 112 of which are operating at a loss.

There are some rays of hope: Boxer grew sales by 17.3% and opened 50 new stores. Pick n Pay Clothing opened 58 stores and delivered market-leading sales growth from its standalone stores.

And online sales are doing well: e-commerce is up by 74.4%, mostly attributable to 102.3% year-on-year growth from its on-demand platform asap! and sales of Pick n Pay groceries on Takealot’s Mr D app.