Pick n Pay (PIK) – Growth dilemma

Despite the strong growth of Boxer, it seems the group’s turnover might be weighed down by the underperformance of the Pick n Pay supermarket chain. We were surprised by the extension of the cost-cutting program as it follows an eight-year period when the previous CEO achieved significant efficiency improvements (including two rounds of retrenchments). We are concerned that the excessive focus on cost-cutting can negatively impact operations if the cuts are too deep. Management believes there are significant growth opportunities in the lower-income segment and plans to open 200 Boxer stores over three years. However, our analysis based on comprehensive surveys of household spending by Stats SA, indicates this market may be substantially smaller than management estimates. We think the upside opportunity may be less compelling and are concerned that PIK will be allocating considerable capital and attention to a low-growth, low-margin segment, while competitors capitalise on the opportunities in the more profitable higher-income segments.