e-spaces

By Tom Robbins

Cape Town – Fitch had affirmed Pick n Pay’s credit rating, noting the “defensive nature of the food retail business” and highlighting the group’s consistent sales growth, the ratings agency said last week.

Fitch’s view of Pick n Pay contrasts with the performance of Woolworths Food after the company released a trading update last week. The Woolworths Food format includes a higher proportion of premium foods than Pick n Pay.

Woolworths said that grocery sales for the 20 weeks to this month were up by 9.8 percent compared with the same period a year ago. Pick n Pay sales from continuing operations in the first half to August were 16.4 percent higher to R23.65 billion, with store inflation of 13.5 percent.

The Woolworths Food sales growth figure of 9.8 percent was after it had expanded aggressively, adding 17.7 percent in floor space. On a same-store basis, Woolworths sales were down 0.8 percent and fell as much as 10.4 percent in real terms, after stripping out price rises of 9.6 percent.

Pick n Pay’s real sales, stripping out inflation, over the six months to August were flat, including new stores.

Fitch said it had affirmed Pick n Pay’s long-term credit rating at A plus with a stable outlook and its short-term rating at F1.

Earlier this month it revised the outlooks of Absa, Investec and Nedbank from stable to negative. Banks are more cyclical than supermarkets.

Referring to Pick n Pay, Fitch said the defensive nature of food retail tended to moderate potential falls in revenue and operating margins arising from lower consumer spending. It would closely monitor Pick n Pay, but the “recent decline of food prices” could ease challenging trading conditions, Fitch added.

Quinton Ivan, a portfolio manager at Coronation Fund Managers, said the Woolworths update highlighted a trend among its core middle to upper customers of buying down to cheaper food price points within the retailer’s stores.

Ivan said it was previously established that Woolworths had lost customers, including some it had picked up in the boom years, to traditional supermarket groups in the downturn.

Woolworths Food proved to be more cyclical than traditional supermarket groups, which were more defensive during the downturn, Ivan said.

Its most loyal customers, those in more affluent segments, were proving to be the most financially stressed due to a combination of higher debt and rising interest rates.

Ivan said Woolworths’ reaction, which was to introduce more competitive entry-level price points and reduce the proportion of private-label deli items in exchange for a broader variety of national branded groceries, could make sales steadier in hard times.

This meant customers could do a complete shop at its stores, but it risked alienating traditional Woolworths customers, which might hinder profitability in good times, Ivan said.