As Pick ‘n Pay loses its lead in the stores market and Pepkor gains ground, Jacques Magliolo explains why Pepkor is the horse to back
Behind the scenes battles took place in two of South Africa’s largest stores listed companies in 1994. While Pepkor finished the year by concluding a major corporate deal and seeing its share price soar by 56 percent, Pick ‘n Pay fell prey to labour unrest and loss of market share and saw its share price halve.
Pick ‘n Pay’s chairman, Raymond Ackerman, was sparring with Olympic officials this week while market forces pushed his company’s share price to an all-time low, falling to 800 cents from 1 650 cents eight month ago.
Speculation in the marketplace is that Pick ‘n Pay has reached a plateau, while Pepkor is the horse to back, both in opportunity for future share growth and company strength. How true are these assertions and what are investor perceptions?
Doubts about Pick ‘n Pay are not new. Since 1989 experts have said the company has reached maturity, has run out of steam, is losing market share and that attitude problems towards labour at board level prevent effective union negotiations.
On the other hand, there is a perception that Pepkor, under the chairmanship of Christo Wiese and his deputy Arnold Louw, will not be stopped by poor economic or political fundamentals. Pepkor is viewed as a company with sound business acumen, accurate assessment of new markets, growing market share and an aggressive takeover philosophy –backed with substantial cash on hand.
It has taken nearly six years for Pick ‘n Pay’s share price to reflect these negative market perceptions. Now drastic action is needed to allay investor fears that the price will continue to slide.
“Last year saw worker expectations, encouraged by political change, rise to unrealistic levels,” says Pick ‘n Pay’s joint managing director Rene de Wet. “Workers think that we are a rich company and they have not taken into consideration that years of recessionary conditions have hit us, not to mention violence, increasing petrol prices, capital and internal cost pressures,” he says.
In the year to end-March 1994 turnover had risen by a mere four percent, compared to the previous year’s 8,7 percent. Turnover per employee was also down from eight percent to 7,8 percent.
Experts indicate that this was even before the strike action crippled the share price. In the following six months turnover climbed by six percent, but trading income fell by a phenomenal 38 percent, compared to the 1994 year increase of 1,3 percent.
“We foresee a similar 1995 financial year end, but a recovery next year,” says De Wet. He indicates that while turnover remained virtually flat during this period, “cost of labour has increased, but we have undertaken no retrenchment programme.”
According to De Wet the company is over-employed by some 3 500 staff members, which — at an average salary of R2 000 per worker — represents an above-the-line annual cost of R84-million.
Comparatively, Pepkor had a similar set of results for its 1994 financial year: turnover climbed by six percent and operating income by three percent. Yet in the following six months, the company did not collapse under a multitude of labour problems, nor did it suddenly lose market share.
Pepkor’s interim results displayed a 19 percent increase in turnover and a 16 percent climb in operating profit.
In achieving such results, Pepkor has managed to spearhead the Shoprite/Checkers resurgence, ending the year with a 28 percent stake in the food market and falling just short of Pick ‘n Pay’s 32 percent. The remainder of the market is shared by Spar and OK (17 percent each) and Woolworths (five percent).
The question is, can Pick ‘n Pay recover? Can it remove Pepkor as a threat to its market share?
Says De Wet: “We lost R100-million due to the strike, but we are now going to sort these problems out.”
To recover from the strike, Pick ‘n Pay intends to become more competitive by shaving gross margins (reducing prices at its nationwide chain of Hypermarkets), reassessing stock holdings, reducing capital expenditure and targeting new markets.
Pick ‘n Pay plans to undertake a number of initiatives this year. It is opening up stores in townships; it has launched a Family Pick ‘n Pay store franchise (six will be in operation this year); and it has bought a 50 percent stake in Score Supermarkets, which has 100 stores targeting the lower income end of the market.
De Wet says: “Our stake in Score will be increased to 75 percent this year and, within the next four years, 70 percent of all new Pick ‘n Pay stores opened will be based in the townships.”
Pepkor, on the other hand, has targeted the lower income market since its creation in 1965 by Renier van Rooyen. Deputy chairman Arnold Louw says: “We are a progressive company, targeting the mass market, which we see as offering growth and better income possibilities.”
This growth need not necessarily come from the food sector. In fact, the company’s purchase of a 24 percent stake in Waltons for R140-million proves that it now has a different focus to Pick ‘n Pay.
“We have positioned the group to be a global player and moved into Scotland and, more recently, into Zimbabwe, and will soon possibly enter Zambia,” says Louw. “Our South African objective is to position ourselves for markets which will benefit from the reconstruction and development programme (RDP).”
Louw believes that Waltons will provide the company with the opportunity to reap future benefit from a growth in demand for stationery as education is a prime goal of the RDP. Growth in the building and construction industry will be catered for by Cashbuild, a subsidiary of Pepkor, which has 80 stores.
Will the company continue to aggressively target another takeover deal? Louw says that the furniture industry is a possibility, but that they are in no hurry.
“We have gone through a good year and I am bullish about the year to come,” he says. With a gearing level of less than 20 percent and with R641-million sitting in the bank, it becomes clearer why experts suggest that Pepkor is the horse to back.