Pick n Pay chair warns of food shortages and social unrest if rolling blackouts escalate

4 May 2023

SA’s entire food industry is under existential threat, with a high likelihood of social unrest relating to food shortages and possible store closures if blackouts are escalated, Pick n Pay chairperson Gareth Ackerman has warned.

Pick n Pay chairperson Gareth Ackerman was frank in his assessment of the substantial impact of rolling blackouts — significantly worse during the second half of the trading year — on the retailer’s performance.

Burning diesel in generators had added massively to Pick n Pay’s costs in recent months, which has made the year under review an “extraordinarily challenging time”, Ackerman said at an investor presentation after the release of Pick n Pay’s full-year results.

“South Africa is simply not growing at the required rate to ensure improvements in employment and living standards for all South Africans. We need to grow the size of the cake before we try to cut it differently.”

The power costs have caused Pick n Pay to miss dividend estimates, as it declared a dividend of R1.85 a share for the 12 months ending 26 February — less than Bloomberg’s R1.92 median estimate. Sales rose by 8.9% to R106.6-billion.

Expressing gratitude to CEO Pieter Boone and his team, Ackerman commended Pick n Pay for a resilient performance in a challenging environment. He also praised the excellent progress made on the Ekuseni strategic plan, which was introduced in May last year to stabilise the business and drive growth.

But, South Africa is at a particularly precarious moment, with official unemployment at 32.7% and an economy that is “not even standing still, it’s going backwards”. The IMF has forecast SA’s growth for the year at just 0.1%.

“Investment in our economy is critical. Pick n Pay’s investment of R4-billion into the business over the past year shows our commitment to build for the future. Not many companies in SA are making this scale of investment.”

Food shortages

He said food manufacturers were not able to invest enough in their plants to maintain an adequate market supply, which will affect food security, and that SA was doing poorly in terms of attracting foreign investment.

“I feel compelled to caution that the entire food industry is under existential threat. The probability of social unrest relating to food shortages and possible store closures if blackouts get too high is now heightened.

“Faced with the reality of structural economic decline, the only meaningful government action seems to be inaction, and to place blame on those trying to help solve the problems.”

Pick n Pay has recently spent about R60-million per month on diesel, a total of R522-million.

“It is an extraordinary challenge to manage a business on this basis. Without this unnecessary cost, our results would have beaten our own forecasts and those of many external commentators.”

Rubbing salt into the wound is the fact that “37% of the cost of each litre of diesel Pick n Pay has bought… has gone into government coffers and the [Road Accident Fund] as a windfall tax.

“This is unconscionable, particularly when rolled up across the economy and the hardship the blackouts are causing. Requests by the retail industry to be included in the government’s diesel rebate package have so far fallen on deaf ears.”

No company can absorb these costs indefinitely, given the scale of the investment needed to keep the power on and stores open.

He said Pick n Pay had also absorbed much of the cost of inflation, particularly on basic commodities, by saving costs in its business, but it cannot insulate consumers entirely from the impact of the energy crisis.

Despite these pressures, Pick n Pay has again this year kept internal inflation below CPI — at less than half the current food inflation high of 14% — which is taking a “Herculean effort”.

“It is therefore distressing to see irresponsible efforts to shift the blame for food inflation on to retailers. The recent statements by the Competition Commission and government spokespeople are a case in point. They have inexplicably accused the sector of making unjustifiable profits. This is incorrect and irresponsible.”

Food waste

Turning to food waste, Ackerman said an estimated 45% of SA’s total food supply was lost or wasted each year, which is worsened by blackouts.

“Over the past four years, we have reduced food waste by nearly 30% as we work steadily towards our target of 50% by 2030. We have also donated more than 880 tonnes of edible surplus food to FoodForward SA, valued at more than R35-million. We are also working with [the] government to change some of the regulations which would allow more edible surplus food to go to those who really need it.”

Turning to macroeconomic issues, he lashed out at the government, for mixing policy with ANC politics, by risking the African Growth and Opportunity Act and other bilateral agreements through its overt support for Russia in its war on Ukraine and threatening to withdraw from the International Criminal Court, which “is beyond understanding”.

“That’s before we’ve even considered the possible effect on Western economies’ pledge to help finance the energy transition away from coal to the tune of $8.5-billion. Without this capital, it will be difficult to end the blackouts and reduce our reliance on coal-generated power.”

Results

Pick n Pay group turnover increased by 8.9%, with Boxer — one of the fastest growing discount supermarkets in southern Africa — boasting sales growth in South Africa of 20.2%. In the past year, Boxer opened 60 new stores and is on track to deliver its target of opening 200 stores and doubling sales by FY26.

Pick n Pay SA grew by 4.3%, with sales affected by some disruptions in stores after the group began last year to implement its new customer value proposition, which entailed decoupling brands in the group. That saw the launch of Pick n Pay QualiSave, which targets the middle and lower end of the market and comprises 118 stores; the full conversion of 131 Pick n Pay and QualiSave stores, which has helped lift sales by 10%; and Pick n Pay Clothing, which has seen a 15.3% sales growth from standalone stores. The group opened 58 new clothing stores in the past year, more than double the number in FY22.

“We are rejuvenating our PnP brand into PnP and PnP QualiSave to better serve customers with a more customised customer value proposition. We are accelerating our Boxer and Clothing growth engines to give customers greater access to these winning brands. Our omnichannel and digital offerings are delighting more customers, and will provide a strong runway for growth in the coming years.”

E-commerce has certainly been encouraging, growing by 72%, with on-demand sales growth (delivery within the hour) well in excess of 100%, driven by ASAP! and the new Pick n Pay offer on Mr D, which was launched in October 2022.

Despite spending R522-million on diesel to run generators (R430-million net of electricity savings), and incurring costs in implementing its Ekuseni plan, the group limited cost growth to 7.9%, due largely to R800-million in efficiency savings.

“We continue to invest and build our channel business online sales close to double their contribution to overall sales,” said CEO Boone. “The growth has been largely driven by our on-demand grocery offers, which have more than doubled in sales over the past year. We are on track to grow this business [eightfold] over the next four years.”

He said the launch of the QualiSave brand would offer customers with the highest financial exposure a cost-effective option. More than 25% of the group’s stores were now geared towards the fastest-growing lower and middle-income market.

On-demand service was doing well for the group.

Pick n Pay’s chief transformation officer, David North, explained: “In most overseas markets, say Europe or the UK, on-demand or one-hour services are a pretty small minority, often below 10% of the total market. They are much more focused on scheduled delivery which is next day or next week advance bookings.

“The market here has leapfrogged into a one-hour on-demand market. Our sales growth for on-demand across [ASAP! and Mr D] is well in excess of 100%. So we’re pleased with that. It leverages existing assets and it doesn’t lead to massive Capex costs that we’ve heard about overseas.”

Last week, the World Retail Congress heard how consumer preference for online shopping was booming internationally but so far, very few retailers around the world have been able to make e-commerce profitable. This is despite sinking more than $1-trillion into digital over the past five years

North said Pick n Pay’s entrepreneurial teams had worked smartly, in a lean environment, which had not required so-called dark dedicated fulfilment centres and significant investment in apps and other systems.

“They’ve understood very well how to leverage existing assets, eg, picking up from stores, so on-demand is fulfilled from stores. We use a bike delivery service for ASAP! and we have a commercial agreement with the Takealot group in respect of utilising the Mr D assets.”

Pick n Pay is the first of the major retailers to report financial results that cover a substantial period of the latest bout of rolling blackouts, but North said all retailers were in the same boat.

“Load shedding only intensified from around October of last year, so… [spending R522-million on diesel] covers less than half of our trade year.

“We reckon that the net cost of burning diesel this year, at the rates of load shedding that we have been seeing in the first couple of months of this year, will be around a billion rand.” DM/BM

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