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Johannesburg - Retail group Pick n Pay would be better off selling its Australian operations and channel the resources towards local and continental expansion.
Speaking after the group posted its February 2010 year-end results - which showed earnings growth at Pick n Pay was lagging those off its peers - two analysts said the Australian subsidiary was not core to Pick n Pay and the group can better use these resources elsewhere.
Pick n Pay bought the Franklins supermarket chain in 2001, but has struggled to turn it into a long-term profit enhancing business with good returns.
"There's no official position from the company [Pick n Pay] as yet. But from an investor point of view, the Australian subsidiary has been some sort of a headache. The feeling is that the business is not core to Pick n Pay," said Danie Pretorius of RMB Morgan Stanley.
Chris Gilmour of Absa Asset Management said he expected Pick n Pay to "make a dignified exit" out of Franklins. "They haven't been able to get it right. I would be very surprised if they stayed for much longer."
He said past experiences showed that South African retailers generally battle in Australia, with the exception of Metro Cash & Carry.
He said that Woolworths - which operates Country Road in Australia - took about ten years to get it right.
"I suppose you could argue that Pick n Pay should hang-on for sometime. But I just think it's not worth the hassle and it's a costly business to run," said Gilmour.
In the past year, Pick n Pay said Franklins' turnover was 1.4% up and produced a profit of R21.9m (same as last year).
It also signalled it was still committed to the business.
Said CEO Nick Badminton: "The positive impact of the three-year, Aus$50m store refurbishment programme continues to be felt with refurbished stores achieving double-digit sales growth and improved profitability. Eighteen refurbishments have been completed, with a further eight being planned for the next financial year."
Commenting on the overall results of the company, Badminton described the past year as an "exceptionally tough" trading period.
The group reported a 1.1% increase in headline earnings per share to 236.33 cents while turnover was 9.8% up at R54.7bn.
Gilmour said while the numbers were disappointing, it ought to be remembered that Pick n Pay had lagged its peers in centralising its distribution facilities and in continental expansion.
However, Pretorius was not surprised. He said while Shoprite grew volumes towards the end of last year Pick n Pay struggled in that regard.
He added that while Pick n Pay had taken measures to reduce its prices, it had seemingly not filtered down to consumer perceptions.
Looking ahead, Badminton said the group was confident it will start to reap the benefits of its strategic initiatives, including store footprint expansion, continued improvement in the shopping experience, as well operating efficiencies through the supply chain and operating cost reductions.
"In the year ahead we plan to open a further 27 supermarkets under the Pick n Pay and Boxer brands and are working on opening substantially more new stores for the years thereafter."
On Africa expansion, he said the group was due to open its first corporate store in Zambia midyear, has signed up franchise partners in Mozambique and has identified sites for expansion into Mauritius.
- Fin24.com
