Pick n Pay’s competitors have an "open road" to entrench their positions, as the retailer implements its turnaround plan and "works out" how to address competitive threats, an analyst says.
The grocer is applying a transformation strategy after several years of poor performance driven by high costs, a failure to implement centralised distribution, and labour problems which have seen it lose market share to its rivals Shoprite and Woolworths.
"During the next three years, Massmart will seek to achieve a far more meaningful exposure to the middle end of the market, which is Pick n Pay’s core market and that could just add another threat to what Pick n Pay is already facing," Nedbank Securities analyst Syd Vianello says.
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According to Massmart CEO Grant Pattison, the group has reached critical mass in the food retailing sector. The company targets the LSMs (living standard measures) seven to 10 bracket through its Makro division’s existing fresh food offering and Foodco — a concept store and supermarket within Game stores. There are now 20 Foodco stores, and plans to develop a national footprint with at least 85 stores by 2016.
Massmart’s foray into food retailing is also aimed at consumers in LSMs two to six through its Cambridge Food stores that cater mainly to commuting shoppers in inner-city areas. "We are now focused on becoming a significant and fierce competitor," Mr Pattison said late last year.
Last month, Game MD Jan Potgieter said the company had decided to introduce a wide range of dry goods to complement its grocery and fast-moving consumer goods offering. Within Game, about 20% of store space will now be allocated to groceries. The company’s long-term strategy is to grow this to 5000 line items in all Game stores.
Shoprite is building its war chest. Early last year, the chain announced an R8bn concurrent share and bond offering aimed at raising funds to expand operations, a move analysts said would help it take on Walmart-backed Massmart.
Meanwhile, Woolworths fired its first salvo in the trolley wars, with the opening of its R20m full-line supermarket in April.
The company is trying to woo its well-heeled customers into buying more than just meat and fresh produce from its stores, by introducing a variety of product categories and bulk value buys with its large-scale supermarket strategy.
Pick n Pay’s restructuring entails a more centralised business model aimed at cutting costs and improving customer experience. In October, Pick n Pay said it would beef up its presence and add 225 stores in 18 months. Deputy CEO Richard van Rensburg said the company’s goal was to be "the leading retailer again when it turns 50 years old in 2017".
He also announced plans to transform Pick n Pay, saying this would involve changing the business operating model. "We have split it into two phases — foundation and optimise.
The foundation phase will end in June 2014, and once it is implemented, we will begin to optimise it," Mr van Rensburg said.
But plans to turn its business around will take far longer to materialise, analysts say.
Chris Gilmour, an analyst at Absa Investments says a dose of realism needs to be injected.
"They first started changing things five years ago when they did that R100m makeover where they took the apostrophe out of their name," he says.
"At about the same time they started tinkering with centralised distribution — so this has been going on for some time, they have realised for quite a few years now that they’re well behind the curve and they need to do a lot of things.
"We are going to have to be very patient.
"The impression I get is that we are looking at the best part of another five years before they get back to where they think they should be," he says.
Although Pick n Pay has made sizeable investments to improve operating efficiencies, the company remains under pressure.
In October, it reported a 34% drop in first-half profit.
According to Mr Vianello, Pick n Pay should be concentrating on its core business.
"Many of the things that they are doing now I believe that they shouldn’t be doing now, like rolling out clothing stores and going heavily into Africa. They should redirect their energy to where the problems are. I don’t see a turnaround for another three years, and that means 2016," he says.
Pick n Pay’s incoming CEO, Richard Brasher, who is to take the helm next month, has said he would ensure the company again becomes the most successful retailer in Southern Africa.
"I hope my experience will give the company the confidence to press forward. I like a challenge. I like winning and competing. We are going to work hard to get our trading going … our transformation in place. We will create an efficient and effective Pick n Pay for the future," he said in October.
Mr Brasher was Tesco’s CE of UK operations.