Integrated

Annual Report

2018


NAVIGATING OUR REPORTING SUITE

NAVIGATING OUR REPORTING SUITE

Our six capitals

Our ability to create long-term sustainable value for stakeholders depends on the use of various capitals within our business. The International Integrated Reporting <IR> Framework supports integrated financial reporting, and, in particular, the reporting of the Group's business model across these six forms of capital. Refer to "Our business model" on pages 20 to 21 for more information.

Financial

Human

Manufactured

Social and relationship

Intellectual

Natural


Our key stakeholders

The Group is committed to open and constructive engagement with all our stakeholders. Our business model and strategy are designed to consider and address the issues and concerns most relevant to our key stakeholders. Refer to the "Engaging with our stakeholders" section on pages 38 to 41 for more information.

Customers

Community

Employees

Suppliers

Franchisees

Shareholders


Our business acceleration pillars

The second stage of our strategic long-term plan is organised around seven business acceleration pillars. These pillars represent the material growth opportunities that can materially affect our ability to create value over the short, medium and long term. Refer to our "Strategic focus" section on pages 44 to 51 for more information.

Better for customers

A flexible and winning estate

Efficient and effective operations

Every product, every day

A winning team

Boxer–
a national brand

Rest of Africa – a second engine of growth


Previous
Richard Brasher

Richard Brasher
Chief Executive Officer

A Message from our CEO

PICK N PAY IS SA’S MOST TRUSTED RETAILER

Pick n Pay was recognised
by the Reputation Institute as
South Africa’s most trusted
retailer last year, and as the
third most trusted company in
the country. I am proud of this
accolade, as it is voted on by
South African consumers, and
it embodies everything we
do every day across all
our stores and operations to
make the lives of our
customers easier and better.


This has been the most important year so far in my tenure as CEO of Pick n Pay. Against a very difficult economic background, we took decisive action to reduce our costs, modernise our offer, and improve the value we offer to South African consumers at a critical time. Our accelerated efficiency efforts added cost and disruption in the first part of the year; however, the Pick n Pay Group is a fitter, stronger and more competitive business as a result of this action.

Ongoing capital investment, together with the successful implementation of a number of key strategic initiatives – including the modernisation of Smart Shopper, a streamlined labour force through a voluntary severance programme and our buy better programme – enabled a substantially improved customer proposition through lower prices, better stores and our growing range of own-brand products. This strategy paid off with an exceptional final-quarter trading performance, where we delivered sales growth well ahead of the market, and solid market share growth across a number of our formats.

Pick n Pay was recognised by the Reputation Institute as South Africa's most trusted retailer last year, and as the third most trusted company in the country. I am proud of this accolade, as it is voted on by South African consumers, and it embodies everything we do every day across all our stores and operations to make the lives of our customers easier and better. The Group will always respond to the needs of society in good times and in bad, driven by a genuine purpose to make a meaningful contribution to the communities we serve.

Economic and social challenges persist, but our team is systematically and sustainably changing the performance trajectory of the Group. The greater efficiency and cost-effectiveness of our operating model will have a positive impact on future sales and earnings, and we are confident that the momentum achieved over the past few months will carry through into the 2019 financial year.

PROGRESS ON OUR PLAN

The difficult decisions taken in 2018 and the hard work and commitment from our teams is evident in the substantial progress delivered against our long-term plan.

Greater centralisation across the supply chain
Total Centralisation

We took more products through our Pick n Pay distribution centres this year, with the total volume of centralised supply increasing to 68% (FY17: 60%). Centralised grocery volume has reached 70% across the country, with the centralisation of fresh and perishable produce at 80%, and general merchandise at 40%.

Centralisation in the Western Cape region, serviced by the Group's Philippi distribution centre, now stands at 78%, with centralised grocery volume at 90%. The Philippi distribution centre now delivers to all our stores along the Garden Route of South Africa, providing improved availability across the region, and driving further cost savings and efficiencies along the 300 km coastal stretch into the Eastern Cape.

Centralisation in the inland Gauteng region of South Africa, serviced by the Longmeadow distribution centre, has reached just over 70%, with grocery centralisation now at 75%.

Pick n Pay's new grocery distribution centre in KwaZulu-Natal is now fully operational and began delivering to stores in March 2018. Stores across the region will benefit from less trucks at their back door, more frequent deliveries and improved stock availability.

Boxer opened a second distribution centre in East London in the second half of the year, which is delivering groceries to its stores across the Eastern Cape. Boxer has demonstrated the same conviction as Pick n Pay in building a cost-effective, fully centralised supply chain. The benefits of its warehouse management system and improved demand planning and replenishment are evident in its reduced stockholding, improved on-shelf availability and exceptional waste management.

A modern loyalty programme

We modernised Smart Shopper in March 2017, delivering a more innovative and contemporary loyalty programme, offering greater relevance to customers. The programme is now significantly cheaper for the Group to run, with cost savings reinvested in lower prices for customers. The increase in product-specific discounts has delivered stronger customer advocacy and enabled greater supplier participation and funding. We offered R3 billion in personal discounts to our seven million Smart Shoppers this year, and saw the redemption of personalised vouchers double.

Buying for less

Our buy better programme has focused on closer collaboration with suppliers to improve efficiencies and lower costs across the supply chain. The programme is supported by a dedicated IT platform and supplier portal within Pick n Pay, providing comprehensive real-time product and supplier data to facilitate transparent fact-based engagement and accurate decision-making. The programme has strengthened relationships with over 3 000 suppliers, improved our inventory management and provided greater value for customers.

Lower prices and stronger promotions

In March 2017 the Group invested R500 million in price cuts across 1 300 everyday groceries items, and extended this investment to 2 000 lines over the year, including unbeatable deals on fresh fruit and vegetable combos, and keen pricing on key butchery lines. Selling price inflation was restricted to 2.2% for the year (FY17: 6.1%), well below CPI food inflation of 5.9%.

Our work on pricing could not have come at a more important time. 84% of South African families survive on a household income of less than R20 000 per month. Pick n Pay and Boxer serve customers across all communities and income groups, and we are determined to meet the needs of all our customers, including the most vulnerable in our society.

We have spent a number of years repositioning Boxer into a lean and agile discount supermarket, and we are particularly gratified with the strong performance from this business. Focusing on middle and lower-income customers, Boxer has accelerated its turnover growth in a highly contested market. It has continued to win customers in tough times through a compact and well-defined range, highly competitive prices and a compelling meat and fresh produce offer. I am confident that Boxer is without doubt South Africa's leading limited-range discount supermarket.

A flexible estate with a wider reach

Our space growth is measured and considered, focused on sites which can deliver sustainable long-term returns. Changing customer demographics and needs provide good opportunities for the Group to grow our sales and extend our reach without impacting on existing stores or trading densities.

The Group, excluding TM Supermarkets, opened 124 net new stores this year (153 additions, 29 closures), adding 3.3% to its total space. This included 72 new Pick n Pay company-owned stores and 22 Boxer stores across all formats.

The Group opened 59 franchise stores across all formats during the year. The Pick n Pay franchise model is an effective way for emerging entrepreneurs to build businesses, leveraging the buying, distribution and systems capability of Pick n Pay. We support and mentor 14 convenience spaza shops across townships in Gauteng and the Western Cape. These stores reflect a transformative partnership between Pick n Pay and Government, bringing a broader range of safe and affordable food directly to neighbourhood communities. Pick n Pay will continue to play a positive role in growing the informal retail market in South Africa in order to transfer skills and ownership to economically marginalised entrepreneurs.

Better stores
Number of stores

We continued to invest in the quality of our estate, with 80 refurbishments over the course of the year, across 61 company-owned and 19 franchise stores. Major store refurbishments included Pick n Pay's flagship Constantia supermarket in the Western Cape, its Durban North hypermarket in KwaZulu-Natal and the Northgate Hypermarket in Gauteng. These stores all demonstrate the ongoing development of the Group's Next Generation store format and operating model, with an improved store design, a more compact range and a strong fresh and convenience offer. Our Next Generation stores continue to deliver like-for-like turnover growth ahead of the rest of the estate, giving us ongoing confidence in the merits of our investment.

We have delivered solid progress on our journey to invigorate our hypermarket business – 75% are now the right size, 50% have been modernised, and in 2018, 100% were more competitive. We are particularly encouraged by the performance of our two new-look hypermarkets, in Durban North and Northgate, which, after major renovations, have been down-sized and redesigned to offer light, bright and spacious shopping experiences, with greater trading space, a stronger fresh produce range and a differentiated general merchandise offer.

A compelling own-brand and convenience range

Our growing range of own-brand products and convenience meals is an increasingly important part of our differentiated customer offer. Pick n Pay introduced 730 new or refreshed own-brand products over the year, including 25 products from its "Pick Local" supplier development programme. There is growing customer support for our own-brand products, with a number of products growing at more than double the rate of independent, national brands in the same category. Pick n Pay was particularly proud of the recognition received for its range of convenience meals, which earned 20 first places in the Sunday Times Food Awards.

Boxer is also finding success with its own-brand products, with strong growth in own-brand staple commodity products like maize, maas and canned vegetables.

Leading online offer

Pick n Pay is the leading online grocery retailer on the African continent. The Group continues to invest in its digital platform, providing customers with unbeatable convenience and ongoing innovation. Pick n Pay's online offer was boosted this year by a new mobile-enabled website, which makes online shopping easier than ever before. These and other improvements have generated a 150% increase in online customer registrations, with a 70% increase in customers accessing Pick n Pay online from a mobile device. Our dedicated online distribution centres in the Western Cape and Gauteng are giving customers a broader range, better availability and consistently high standards of delivery.

Financial services

Our partnership with TymeDigital (a subsidiary of the Commonwealth Bank of Australia) is providing our customers with greater access to banking services at the lowest cost across the banking industry. The partnership leverages off Pick n Pay's substantial store and IT infrastructure and Commonwealth Bank of Australia's extensive digital banking expertise. During the year, our money transfer service attracted over 300 000 new customer registrations.

Pick n Pay Food

Pick n Pay launched its first store account in September 2017, in partnership with RCS, a local subsidiary of BNP Paribas Bank. The Pick n Pay account offers the most affordable form of credit in the market, with a 55 days free credit payment option and no joining fee or hidden administration fees. After careful, individual assessment, store accounts were opened for 56 000 of our more affluent customers over the last six months of the financial year. Credit spend was below R200.0 million, with customers electing to use the Pick n Pay credit facility prudently and as an alternative to other forms of more expensive credit, with the majority of our customers electing to pay off their credit each month thereby incurring no interest charges.

The account is accessed through the customer's Smart Shopper card, with all the related benefits of our loyalty programme, with the credit provider carrying all associated funding costs and credit risk.

We will use the broad reach of our infrastructure and the strength of our IT platforms to innovate with financial services and other value-added services for the benefit of our customers.

LOOKING AHEAD

South Africa is a significantly more positive country than it was a year ago. President Ramaphosa has committed to greater levels of economic transformation and growth, including through closer collaboration with the private sector to stimulate investment, greater employment, the elimination of corruption and improved levels of service delivery.

Optimism does not automatically translate into sustainable growth. Sustainable growth requires a successful plan, and hard work to deliver that plan. Over this past year, the Group has taken the most decisive action in its 50-year history to cut costs, become more resilient and give the savings back to our customers in the form of lower prices and better value. We have made our shops brighter and more vibrant, accelerated our own-brand offer and taken real steps to become a true multi-channel retail business.

We are changing the trajectory of the Pick n Pay Group, and will build on this momentum in 2019. The Group will continue to invest in a strengthened customer offer across Pick n Pay and Boxer, and we are confident that we can win customers across all levels of our economy. The Pick n Pay Group will be South Africa's first genuine multi-channel business, with a substantive convenience and online presence, and recognition as South Africa's most affordable and inclusive banking partner.

I would like to extend my sincere thanks and appreciation to the Pick n Pay and Boxer teams who have worked tirelessly over the past few years to build a stronger and more resilient business.

Richard Brasher

Chief Executive Officer

22 June 2018