Business

Pick n Pay’s secret weapon

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Until last month, no one besides executives at Pick n Pay knew just how big a part of the overall business its Boxer brand was.

Twenty years after it was acquired by the country’s second-largest supermarket group, Boxer is now a business that will generate more than R30 billion in sales this year, at growth rates of well over 25%.

Already, it is 30% of Pick n Pay’s overall sales in South Africa.

In its interim results for 2023, Pick n Pay disclosed the sales performance of the discounter separately for the first time.

Like-for-like sales growth at Boxer in South Africa was 14%, compared with just 4.5% for the Pick n Pay business.

In effect, sales at Boxer are growing more than three times quicker than at Pick n Pay. In fact, with internal inflation measured at a high 7.2% for the six months, sales are actually going backwards at Pick n Pay in real terms.

A Boxer store might be unfamiliar to the typical Moneyweb reader. In some ways, it is similar to a Shoprite, which may be more familiar, but with a far smaller area dedicated to fresh (fruit, veg, bakery, butchery). It’s closer to a mix between a Shoprite and a U-Save outlet (the latter has a strong bulk and commodity offer).

Fresh occupies substantially reduced space when compared with a Pick n Pay or a Checkers (or even a Shoprite). Together, produce (all pre-packed), fresh meat and the bakery comprise about a fifth of turnover. Stores have fast food counters (think pies and Russians and chips) at the exits – which is a change from the rest of the industry.

Own/private label participation

The key to Boxer’s model is ‘own label’ (also referred to as ‘private label’) products. This is where producers contract-manufacture items for the group in practically every category in store under its own labels, such as Best Cook, Boxer and Golden Ray.

In main categories, it will generally have one to three of its own label products (budget, better, best), and just one other branded product – largely the category leader. So, in baked beans, it has Best Cook, Boxer and Golden Ray products, priced along a continuum and also Koo baked beans (at a premium). In pilchards, it stocks Best Cook and Lucky Star. Its own brands dominate shelf space.

The group says private label participation in Boxer is above 30% and, in some categories, says Pick n Pay CEO Pieter Boone, this is well over 50%. Moneyweb understands there are certain categories where Boxer commands ‘own label’ market share of above 80% in its stores.

These may not necessarily be at a higher margin than it would achieve with an ‘external’ branded product (with the associated rebates and marketing incentives), but – crucially – it is able to control its margin on own brand products.

It can also make a deliberate decision to sacrifice margin on certain items to drive footfall, knowing that it will make this margin up on other higher-yielding categories.

That said, margins on own label (private label/house brand) products are higher than on branded ones, as retailers are able to ‘capture’ the additional margin that, say, a Tiger Brands would earn on its Tastic rice. This high rate of private label sales in Boxer will likely ensure that trading margins in Boxer are higher than in the Pick n Pay supermarket division (the liquor and clothing businesses also enjoy higher margins than food retail).

The far corner of each Boxer store is dedicated to bulk commodities. This looks more like a Makro (and a U-Save) than a supermarket. There are pallets of 10kg packs of sugar, 20kg packets of rice, maize meal and so on.

It runs combo specials on these, and offers are targeted at, among others, stokvels, which leverage their bulk-buying power. This part of the store is responsible for more than a third of trade.

Store promotions are almost always biased towards month-end because of grant payments. It still promises promotions every day, but in the middle of the month these will be concentrated on smaller pack sizes at lower unit prices, for example.

In September, Boone told Moneyweb that it took time for the group to get the Boxer model right. This business, he explained, only started hitting its stride five years ago.

Expansion plans

Between February and August, the group opened 20 new Boxer supermarket stores and converted a further four from franchise to company-owned stores. Again, this is a multiple higher than the one new Pick n Pay supermarket (five new less four closures) and four franchise conversions.

This year, it will open a total of 61 new stores (Boxer Superstores, Boxer Build and Boxer Liquors) – nearly double the 36 achieved last year.

In this expansion, it is entering entirely new communities where it simply hasn’t operated before (under previous CEO Richard Brasher, the Pick n Pay brand was pushed into communities where it hadn’t been – usually downmarket; many of these are now being converted into Qualisave stores).

Going forward, it plans to open 200 new Boxer stores over the next three years across its three formats. Primarily, these will be supermarkets and liquor outlets, with many of the new openings being stores adjacent to one another. To reach that target it will need to add around 40 supermarkets a year with, say, 20 to 30 liquor outlets. A far smaller portion of new stores will be its Build format. In total, the 200 new stores will increase its store footprint by more than 50%.

By 2026, it wants to double the sales of Boxer from what would’ve been the roughly R25 billion level reached in FY2022.

This will be the growth engine for the group and an important lever in reaching its medium-term target of a profit margin (before tax) of 3%.

Market share

At stake is the largest portion of the formal food and grocery market – the R400 billion spent by less affluent consumers.

This will grow to R550 billion by 2026. Key here is the fact that Pick n Pay’s market share of this segment is just 11%, versus above 20% in the middle and more affluent markets.

Read: How Pick n Pay wants to win

Of course, it helps that the Shoprite supermarket business is underperforming relative to Checkers and that group’s other growth initiatives.

In the last year (to July 3), Shoprite and U-Save (together) increased sales by ‘just’ 7.2%. This is approximately in line with inflation, which means that real sales growth is flat. However, the group did say that U-Save sales were up 11.4%, which suggests that Shoprite’s mass-market and middle-income customer base is under significant pressure as sharply higher food, energy and transport prices bite.

Plus, the competitive pressures from Boxer are only going to increase.

Boone and his executive team could not have timed this onslaught any better.

Listen: PnP chief business transformation officer David North on the group’s new strategy and interim results (read the transcript)

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