Why is Pick n Pay selling groceries at a loss?

Since October, supermarket retailer Pick n Pay has regularly been offering Smart Shopper members a limited number of sizeable discount vouchers for purchases made at specific times/days.

As part of its Happy Hour promotion, shoppers can claim discounts of up to 50% off their entire basket. You could, for example, get R500 off a shop of R1 000 or more (or R750 off R1 500). Or R100 off R300 for a purchase made between 11am and 12pm on a Friday.

This past weekend, it offered shoppers vouchers for R200 off purchases of R750 or more for any time on Saturday. That’s a 27% discount! (Other vouchers offer even steeper savings of 33% or 50%.)

This would be fine for a clothing retailer that might have the margins to play with, but grocery retail has famously slim margins.

Pick n Pay’s trading margin for its 2023 financial year was 2.7%. In the six months to end August, it was just 0.1%. (Even world-class Shoprite has a trading margin of ‘only’ 5.5%).

Remember, as well, that Pick n Pay is already sacrificing 0.5% in margin to Smart Shopper members, who ‘earn’ this value back with every purchase. Prior to a change in 2017, it was giving up a whole 1% in margin.

So one can confidently state that Pick n Pay simply doesn’t have margins of 20%, 30% or 50% to give up to customers. None of these discounts are being subsidised by producers – as they would during typical promotions on products – because these are blanket discounts across an entire basket or trolley of purchases.

This means Pick n Pay is effectively – and deliberately – guaranteeing that any sales using these vouchers are being made at a loss. On every R1 000 in sales during Happy Hour, it could easily be losing between R250 and R500 (depending on the incentive).


Are its stores that empty on Fridays (and, seemingly, Saturdays) that it is willing to pay customers to shop there?

We know that sales growth at its core Pick n Pay banner (including Qualisave) has stalled. This is despite an ambitious programme to modernise its stores which, even after their facelifts, still don’t quite match Woolworths Food and the new-look Checkers outlets at the upper end of the market.

At PnP, overall sales between February and August were up 0.3%, which the group described as “disappointing”. After factoring in internal selling price inflation of 8.3%, volumes (goods through the till) are down a shocking 8% year-on-year. This is why Pieter Boone was abruptly fired in October and replaced by veteran Sean Summers.

Is Pick n Pay that eager to grow sales that it is willing to essentially subsidise turnover? Perhaps.

If so, this is clearly not sustainable. It may help sales growth stabilise, but margins are going to take a massive hit.

When it launched ‘Happy Hour’ in October, it said the “initiative forms part of Pick n Pay’s plans to modernise its Smart Shopper programme by emphasising engagement in the coming months”.

It is likely that some or all of these discounts are being funded from its marketing budget.

Instead of spending tens of millions of rands on an above-the-line campaign to drive Smart Shopper engagement, it could’ve chosen to use these targeted discounts on an overall shop. The limited number of vouchers each week means it can cap its expenses.

In the last 18 months, it has consistently increased marketing spend. This is buried in its “merchandising and administration costs” line item, but this is up 3% in the more recent six months and 13% last year. That 3% figure is the overall increase. It all but admits that it cut other costs to increase marketing spend (“carefully controlled variable expenses while focussing on ensuring we increase our voice to market”).

Whatever the underlying motivation(s), it is going to need to ensure that a single ‘subsidised’ visit by a shopper turns into more consistent trips to Pick n Pay (versus its rivals). That is the only way it is going to convert this investment into profitable turnover over time.

Summers is under tremendous pressure to turn around the core business. Could the needle move in the coming months? Summers has said he needs two years. That isn’t an awful lot of time.

Source: https://www.moneyweb.co.za

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