You’d be hard-pressed to find a better indication of where Pick n Pay stands in the retail pecking order than the news that it’s closing its doors in Johannesburg’s upmarket Hyde Park shopping centre. Rumours abound that the closure is to make way for a Shoprite-owned Checkers outlet on the same ground floor corner.
Only, says Pick n Pay CEO Sean Summers, the retailer’s departure is not due to its current woes: big trading losses in its core brand and a debt pile that stood at R6.1bn as of its February year end.
Instead, the store – which the company has run for about 40 years – is just unviable, he says. “It’s totally not fit for purpose – we just can’t reconfigure it to any reasonable use, given that we’ve got about a 50% space utilisation.”
Summers says the closure is purely commercial. “If Pick n Pay was at its prime, I would still walk away.”
Of course, it would be convenient for the company’s many detractors if Shoprite stepped into the gap with a Checkers store (it’s “sniffing around,” Summers admits), but he is in fighting form on the back of the company’s rights offer to raise R4bn in fresh capital.
“There is faith and confidence in the company going forward,” he tells Currency. “The fact that the major shareholders are all following their rights gives substance to that, and just do simple maths – the exercise has been very favourably reported and received.”
Certainly, given the deep discount (shareholders were allocated 51.11 rights offer shares for every 100 shares held), the share price hasn’t fallen further than it should, given the more than 252-million new shares being issued. The offer closes on August 2.
It’s still hairy for existing investors though. The shares dropped 17.4% on July 17 when shareholders received nil-paid letters, which granted them the right to buy new Pick n Pay shares at R15.86 each – about a third lower than the prevailing share price. The next day, the stock fell a further 5%, but rebounded somewhat on Friday July 19, closing the week at R23.33.
The discount “shows you there wasn’t massive appetite – or that it had to be issued at a price that backers would be happy to take it up and it would be fully subscribed”, says Sasfin’s David Shapiro. “So the share price is now adjusting to that reality.”
A debt pile that simply grew too big is the main reason for the rights offer, but it follows years of operational missteps.
“There is a hard slog ahead and the market is reacting to that reality,” says Benguela Global portfolio manager Zwelakhe Mnguni.
“They lost their positioning because they tried to play to all the sectors. They tried to capture the lower and upper end of the market, but their offerings didn’t match. Either their pricing was wrong or their quality wasn’t right for the pricing they had,” he says.
Take, for example, the experience of township shoppers, Mnguni argues.
“Customers go to Boxer and target certain things only that are on special. Their offering feels to me like it doesn’t have broad appeal. But if you understood your customer base better, customers could buy 10 items and they’d capture a bigger base.”
Share incentive
Summers, of course, would say that Pick n Pay is still a household name. “We still get extraordinary support across the country even though it may have slipped back from its former glory.”
He also shrugs off concerns that a proposed separate listing of the Boxer brand will fracture management time and expose deeper fissures in the business.
“Boxer is a completely independent business: it has its distribution centres, buying office, etc,” says Summers.
Summers, who bought Boxer 22 years ago, says the original management team is still largely in place.
The 70-year-old, who began his career at the retailer in 1974, returned to Pick n Pay in February after serving as CEO from 1996 to 2006. To incentivise his efforts to revitalise the company and establish effective leadership structures and a succession plan, Summers will receive 4-million share options worth more than R100m.
“They made a good offer,” Mnguni says. “But he’s got a lot of work to do to try and turn this thing around and it’s not going to be easy.”
Shapiro agrees. “This is not a gimme story – you’re not going to ride into the sunset.”
As for fixing the core business, Shapiro is sceptical. “Once a brand is tainted, it takes a long time [to come right] because your competition is not just lying there and letting you run over them,” he says.
“You’ve seen it in Tongaat, Spar or Massmart – they haven’t come storming back. You’re off a weakened base.”
As to what investors who are long Pick n Pay could hope for in a year, Mnguni says: “If I believed in the story, what should happen is that we would start seeing them stabilise their loss of market share and that would happen only if they put together an offering that is appealing.”
One way to do that is to cut prices to lure customers away from Checkers and Woolworths.
“If they have executed that a year from now, they should be very clear if they stand for price or quality, which has been the grey area for the longest time,” says Mnguni.