Pick n Pay closing stores – and SPAR is smiling

SPAR is well-positioned to benefit from a significantly weakened Pick n Pay. The retailer will continue to take market share from its competitor as it closes stores and tackles its operational challenges. 

The closure of Pick n Pay stores as part of the retailer’s turnaround plan has been well-documented. 

Once South Africa’s dominant retailer, Pick n Pay has experienced a difficult few years. It reported record losses and became technically insolvent in its previous financial year. 

To tackle these challenges, the retailer implemented a turnaround strategy, which included a rights offering to raise R4 billion, alongside plans for a separate listing of Boxer to generate additional capital.

The turnaround strategy aims to restore profitability to the core Pick n Pay business, with a key element being a ‘store reset initiative.’

The company highlighted its focus on reducing losses from specific underperforming, company-owned stores.

“When feasible, unprofitable supermarkets are either shut down or converted into Pick n Pay franchises or Boxer stores,” the company stated.

Additionally, Pick n Pay aims to enhance the performance of its remaining stores by boosting comparable sales and optimising its operating model.

In the past six months, Pick n Pay has closed 20 company-owned locations, including ten supermarkets, four clothing outlets, and six liquor stores.

The retailer also closed 33 franchise stores, comprising sixteen supermarkets, four express stores, and thirteen liquor stores.

As a result, Pick n Pay shut down a total of 53 stores across South Africa between 12 February 2024 and 25 August 2024.

This has enabled other retailers, particularly Shoprtie through its Checkers brand, to take market share from Pick n Pay. 

Asset manager Coronation expects the trend of Checkers taking market share from Pick n Pay to continue. As a result, its premier Top 20 Fund, with over R25 billion in assets, has increased its exposure to Shoprite.

This is due to a combination of short-term tailwinds, such as “two-pot” money and reduced spending on diesel for generators, and longer-term tailwinds from superb management and execution. 

Pick n Pay, on the other hand, has been beset by operational challenges and struggled to compete with Shoprite.

However, Shoprite is not the only retailer set to benefit. SPAR is also picking up the pieces from Pick n Pay’s fallout. 

Investment analyst at Camissa Asset Management, Mohamed Mitha, believes South Africa’s second-largest food retailer will gain market share as Pick n Pay grapples with its own challenges. 

Mitha said Checkers’ strong growth has seen it capitalise on Pick n Pay’s problems the most effectively among South African retailers. 

The Shoprite-owned brand has shown strong self-reinforcing momentum over the past five years, boosted by the effective use of customer data and immense bargaining power over suppliers.

They have consistently gained market share in a challenging trading environment. The Checkers brand has thrived with the success of Checkers Sixty60 and the launch of smaller store formats like Checkers Foods. 

These initiatives challenge SPAR’s convenience proposition, where it has traditionally dominated. 

However, Mitha said a “perpetually weak Pick n Pay” has been a source of market share gains for SPAR as well. 

As Pick n Pay continues to reduce its store footprint and grapple with deep-rooted operational challenges, Mitha expects it to continue losing market share, and SPAR will pick up at least some of the pieces. 

SPAR has its own operational challenges, with it tackling the aftermath of a botched software integration at its largest distribution centre and a costly European expansion. 

Mitha explained that SPAR has made strong progress in tackling these issues and repairing its weak balance sheet. 

The looming disposal of its Polish operations before the end of 2024 should stem annual losses of around R500 million alone. 

The underperforming Swiss business is also under strategic review, which could further reduce debt if sold.

SPAR’s new management is also taking steps to improve performance in its core South African grocery division by changing consumer perceptions of high pricing. 

New product ranges, including the premium Signature Collection and value-focused SaveMore range, have been launched together with a revised customer rewards platform. 

This has enabled it to take market share from Pick n Pay and other retailers, with SPAR’s like-for-like store sales growth keeping up with Woolworths Foods’ when indexed to 2019. 

SPAR also has considerable competitive advantages, with its franchising model enabling it to function almost as a wholesaler and distributor to stores operating under its brand as opposed to an integrated retailer. 

This system also enables independent retailers to source better deals from other wholesalers and to stock products not supplied by SPAR.