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

Our economic environment


The retail market in South Africa
is diverse and is marked by wide
disparities in income and geography.
The Pick n Pay Group, with
a celebrated history of more than
50 years in South Africa, benefits
from broad-appeal across all
socio-economic groups and
strong brand loyalty in the
grocery retail market.

CORE SOUTH AFRICAN OPERATIONS CONTRIBUTE 95% TO TURNOVER

Operations in the Rest of Africa contribute 5% to turnover

SOUTH AFRICAN RETAIL ENVIRONMENT
  • Real GDP growth of 0.9% in 2017
  • Unemployment of 27%
  • Lower level of inflation in 2018, with CPI food falling from 11.0% in 2017 to 5.9% in 2018
  • Retail sales growth of 4.8% year on year in the first quarter of 2018
SOUTH AFRICAN RETAIL ENVIRONMENT

A number of retailers operate across the formal and informal markets of South Africa. The food and grocery market in South Africa is complex and difficult to measure precisely. This partly reflects the fact that the market has a large and enduring informal sector. The total market has an estimated value of R870 billion, with approximately 60% of the market considered formal, and 40% informal. Five large retailers, including the Pick n Pay Group, account for approximately 55% of the formal market in South Africa. With turnover of R77.8 billion from its South African segment, Pick n Pay has a share of approximately 9% of the total market, and 15% of the formal market. The informal market is made up of a broad range of small, independent shops, community buying groups and other outlets.

The 2018 financial year was once again characterised by a tough economic climate and constrained consumer spending, with real gross domestic product (GDP) growth in South Africa of just 0.9% over the 2017 calendar year. Political uncertainty over the first three quarters of the year, together with elevated levels of unemployment and a growing budget deficit led to credit agencies Fitch and Moody’s downgrading South Africa to sub-investment grade. Consumers continued to exercise prudence in this environment particularly around discretionary spend, becoming increasingly price conscious and value driven.

The Group responded to the tough consumer environment through decisive action on cost and efficiency in order to unlock savings that could be invested in delivering greater value to our customers. The Group delivered substantial investment in meaningful price cuts across 2 000 everyday grocery items, and restricted its internal selling price inflation to 2.2% for the year (2017: 6.1%), well below consumer price index (CPI) food inflation of 5.9% (2017: 11.0%).

Our work on pricing could not have come at a more significant time. It is estimated that 84% of South African households subsist on incomes of less than R20 000 ($1 700) per month. Price is absolutely key for these families, with the vast majority of our customers looking to stretch their grocery budgets by looking for the best deals on staple commodity products and the lowest pricing on fresh produce and butchery items, including through combination deals. Many of our customers rely on public transport, and these associated costs can be prohibitive, with customers needing convenient and accessible shopping locations close to their homes, work or public transport hubs.

In recent years, comparably strong retail growth has been recorded in the lower to middle-income segments of the market, notwithstanding the challenges faced by communities which make up this part of the market. These communities are resilient, dynamic and aspirational, and there has been good growth in retail sales where economic circumstances improve, even marginally (for example, through the availability of social grants). Pick n Pay and Boxer serve customers across all communities and income groups and are well positioned to capture the growth that a fitter and stronger South Africa will deliver.

Traditionally our Pick n Pay brand has been positioned in the more urbanised areas of South Africa, with particularly strong advocacy from South Africa’s middle to upper-income consumer. However, there are still many geographic communities across the country, across all demographics, where Pick n Pay is not yet well represented, and we look forward to bringing our offer to these communities, whether they are in urban, peri-urban or more rural areas. The Group will continue to follow a measured approach to space growth, focusing on space that we are confident will drive sustainable financial returns. Our leaner, stronger operating model has significantly improved our ability to deliver sustainable new space, including through smaller, neighbourhood stores, which reflect the growing customer demand for convenience.

Boxer focuses on middle and lower-income customers and has delivered strong sales growth through resolute focus on price and value, a compact range and a high-quality meat and fresh produce offer.


REST OF AFRICA


SHORT-TERM CONSUMER OUTLOOK

  • Low consumer confidence and restrained spend
  • High unemployment
  • Consumers looking for more value
  • Higher levels of inflation, with inflationary pressure from rising fuel costs, a weaker rand and the recent VAT hike
  • Real GDP growth forecast for 2018: 1.5%

LONG-TERM CONSUMER OUTLOOK MORE POSITIVE, SUPPORTED BY:

  • Greater South African political stability under President Ramaphosa
  • Improved outlook for economic growth and transformation
  • A young population
  • A growing consumer base
  • Good infrastructure
  • Robust and enduring institutions, with strong corporate governance

REST OF AFRICA

The Group has an established presence in Botswana, Lesotho, Namibia, Swaziland, Zambia and Zimbabwe (49% investment in its associate, TM Supermarkets). The Group’s foreign operations contributed R4.6 billion of segmental revenue this year, up 7.7% on last year, notwithstanding difficult trading conditions in some of the regions in which we trade. It was another difficult year, specifically for our Zambian operation, with the region still battling the economic impact of a prolonged drought and a depressed copper price. However, stronger operational efficiency and tight cost control helped to temper the impact of this tough trading environment on sales growth. Notwithstanding the challenges in Zambia, the Group remains confident about its long-term prospects and will continue to build scale in the region and drive growth through a competitive customer offer. The Group’s franchise operations continued to perform well, particularly in Namibia and Swaziland, while the outstanding performer of the Rest of Africa segment was TM Supermarkets. TM Supermarkets has trading momentum, delivering strong double-digit growth in a tough environment in Zimbabwe, characterised by import restrictions, poor stock availability and political uncertainty. TM Supermarkets is benefiting from a positive contribution from its Pick n Pay branded stores and increasing customer demand for Pick n Pay own-brand products. The Group has plans to expand its operations into Nigeria over the next two years. The ongoing formalisation of food and grocery retail across Africa will provide the Group with a second engine of growth in coming years.

OUTLOOK

The Group remains confident of the opportunity that exists within the business for higher sales through an improved customer offer, alongside improved efficiency and profit growth, regardless of the challenges facing South Africa and beyond. However, there is a great deal more political and economic optimism in South Africa than there was just a year ago. The country has a new leader at the helm, and President Ramaphosa has committed to greater levels of economic transformation and growth, including through improved levels of Government service delivery and the elimination of corruption and mismanagement of public funds. President Ramaphosa has indicated that the South African Government will seek closer collaboration with local and foreign business in order to stimulate local and foreign direct investment and combat unemployment in the country. Real GDP is forecasted to improve to 1.5% in 2018, with the Government’s long-term sustainable real GDP growth target at 3.5%.

Local investment and job creation remains a strategic priority for the Group. Over the past three years we have invested R5.3 billion in opening and refurbishing stores and in building our supply chain and, as a result, we have created 13 700 net new jobs. The Group plans to invest a further R1.7 billion in the coming year, and in doing so we will create more sustainable job opportunities. We have, and will play, an important part in alleviating the levels of high unemployment in South Africa and in ensuring that the marginalised in our societies benefit from greater inclusion in the economic prosperity to come.

Ours is a growing business and we are confident of the long-term opportunities in the markets in which
we operate, and of the valuable role we will play in uplifting the communities we serve.