Johannesburg - Welcoming the decision of Pick n Pay Stores [JSE:PIK] to exit Australia after nine painful years, analysts have said the retail group should now channel its capital towards local store expansion and improving supply chains.
Pick n Pay announced on Thursday it had decided to sell its struggling Australian subsidiary Franklins to Metcash Trading for R1.4bn. Metcash is based in Australia.
"This is a positive step in the right direction," said BoE Private Clients equity analyst Shanay Narsi. "The immediate need is to roll out centralised distribution capabilities throughout the country, by building state-of-the-art distribution centres."
Pick n Pay has lagged its peers in the development of distribution centres. The group has, however, been working hard of late to address that. Measures taken include the extension of its Longmeadow distribution centre in Gauteng.
RMB Morgan Stanley retail analyst Danie Pretorius said the sale allows the group to redeploy capital at higher rates of return domestically.
"They need capital to fund the build-out of their distribution centres, as well as for new store growth in South Africa and other African territories."
Pick n Pay entered the Australian market in 2001 through the acquisition of Franklins and Fresco stores. It has struggled with the business, making unsuccessful attempts for years to turn it around.
Conservative on African expansion
"The [Australian] team did a fantastic job but it was difficult for them. We're struggling to compete," said Pick n Pay finance director Dennis Cope.
Pretorius said the Australian market is very competitive, with Coles and Woolworths formidable and much larger competitors. "Franklins as a standalone operation lacks the necessary scale to compete effectively in that market," he said.
As a result Pick n Pay has never really been able to make significant profit out of the Franklins business. In its last financial year, the group said revenue from Franklins marginally grew 1.4% while profit was flat.
Though the R1.4bn price tag isn't a premium, analysts say it exceeds market expectations and is essentially a return of the original investment, estimated at about R1.5bn.
Cope said from an operational point of view, Pick n Pay incurred a loss in the Franklins business because the small profit the group made in recent years was not enough to cover losses from the early years.
Cope said proceeds from the sale would be channelled towards the many programmes the group has put in place for the next couple of years, including local store expansion, refurbishment and supply chains.
The group has previously said it plans to erect 120 new stores over the next two years.
Cope said Pick n Pay remains conservative on African expansion, although this does form part of the group's long-term strategies.
Narsi said because Pick n Pay prefers African operations to be franchised, he expects small investments in that area.
On Thursday afternoon, Pick n Pay shares were 2.7% up at 4 457c.
- Fin24.com
Pick n Pay announced on Thursday it had decided to sell its struggling Australian subsidiary Franklins to Metcash Trading for R1.4bn. Metcash is based in Australia.
"This is a positive step in the right direction," said BoE Private Clients equity analyst Shanay Narsi. "The immediate need is to roll out centralised distribution capabilities throughout the country, by building state-of-the-art distribution centres."
Pick n Pay has lagged its peers in the development of distribution centres. The group has, however, been working hard of late to address that. Measures taken include the extension of its Longmeadow distribution centre in Gauteng.
RMB Morgan Stanley retail analyst Danie Pretorius said the sale allows the group to redeploy capital at higher rates of return domestically.
"They need capital to fund the build-out of their distribution centres, as well as for new store growth in South Africa and other African territories."
Pick n Pay entered the Australian market in 2001 through the acquisition of Franklins and Fresco stores. It has struggled with the business, making unsuccessful attempts for years to turn it around.
Conservative on African expansion
"The [Australian] team did a fantastic job but it was difficult for them. We're struggling to compete," said Pick n Pay finance director Dennis Cope.
Pretorius said the Australian market is very competitive, with Coles and Woolworths formidable and much larger competitors. "Franklins as a standalone operation lacks the necessary scale to compete effectively in that market," he said.
As a result Pick n Pay has never really been able to make significant profit out of the Franklins business. In its last financial year, the group said revenue from Franklins marginally grew 1.4% while profit was flat.
Though the R1.4bn price tag isn't a premium, analysts say it exceeds market expectations and is essentially a return of the original investment, estimated at about R1.5bn.
Cope said from an operational point of view, Pick n Pay incurred a loss in the Franklins business because the small profit the group made in recent years was not enough to cover losses from the early years.
Cope said proceeds from the sale would be channelled towards the many programmes the group has put in place for the next couple of years, including local store expansion, refurbishment and supply chains.
The group has previously said it plans to erect 120 new stores over the next two years.
Cope said Pick n Pay remains conservative on African expansion, although this does form part of the group's long-term strategies.
Narsi said because Pick n Pay prefers African operations to be franchised, he expects small investments in that area.
On Thursday afternoon, Pick n Pay shares were 2.7% up at 4 457c.
- Fin24.com