Does a Pick n Pay, Woolworths tie up make sense?

Two weeks ago Woolworths announced it plans to compete in the large scale supermarket retail space and will open about ten such supermarkets in a “relatively short space of time”. Three weeks ago its executives were spotted on a flight to London. The suggestion is that the company is strengthening ties with Marks & Spencer.

 

A month ago Pick n Pay (PnP) (JSE:PIK) unceremoniously dumped its CEO Nick Badminton and this weekend media reports surfaced that the biggest supermarket in Australia, Woolworths, is in talks with the retailer over a possible partnership.

For the time being Spar is keeping its head under the radar, but you can bet that relationships with Spar in the Netherlands are healthy.
Of course Walmart’s acquisition of Massmart (JSE:MSM) has plenty to do with this. Of the R275bn that is spent in SA annually on groceries and related items, 65% is controlled by Spar, PnP, Shoprite and Woolworths. The remaining 35% is shared between Massmart, Metro Cash n Carry (which is but a shadow of its former self) and thousands of spaza shops. Massmart may be a small player in the space, but none of the retailers are sitting around waiting for Massmart to eat their lunch.

Pick n Pay Chairman Gareth Ackerman has, in years gone by, privately expressed the desire for a “partnership” arrangement with a foreign retailer. However the Ackerman family’s refusal to relinquish management control has scuppered more than one deal.

That could be changing. It is possible that the family could be considering selling a stake in Pikwik, the structure that holds the family’s stake in PnP. They may even consider selling a majority stake in exchange for an extended period – say 12 months – in which to exit the business gracefully.
Ackerman would not comment on the Woolworths speculation. All he would say is that Pick n Pay is in constant contact with retailers regarding strategic alliances, and this will continue.

What is increasingly clear is that doing nothing in SA’s fast changing retail landscape is not an option.

The question is – if rumours about Woolworths are correct – is it the ideal partner for Pick n Pay?

Woolworths is the largest supermarket chain in Australia, followed by Coles, and one of the 50 biggest in the world. It is not related to the SA company of the same name. Its CEO Grant O’ Brian, a Woolworths veteran, took on the position last October and has big plans for growth. He believes Woolworths should be looking offshore for future growth.

But the timing may not be ideal for the retailer. It is losing ground against competitor Coles and critics suggest that it has not invested enough in the core retail business. It is in the process of trying to sell its under-performing Dick Smith electronics chain after writing off AU$300m in restructuring charges in its half year results.

It is also investing AU$2bn on new stores this year, in particular on its big box venture Masters Home Improvements, which is an attack on the dominance of hardware retailer Bunnings Warehouse. (Bunnings and Coles are both owned by Wesfarmers). At the same time Woolworths is bearing down on costs to deal with food price deflation.

If a deal was in the offing, does Woolworths have the management capacity to provide the input needed at PnP? Though Gareth Ackerman and acting CEO Richard van Rensberg have stepped up to the plate, neither wants the job nor is the leader the company needs.

The extent of change the company has absorbed in recent years is threatening to overwhelm management and staff. Without strong leadership at the top, chaos will loom in the levels below.

Pick n Pay and Shoprite are the two local retailers without an obvious offshore partner and neither will want to be the last to move. The coming months should be interesting.

GERT DU PLESSIS
Cape Consumers (Pty) Ltd
Managing Director

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