As news of the severe downturn in the retail industry continues to wreak havoc in overseas markets, TradeInvestSA spoke to Dennis Cope, Finance Director at Pick n Pay, earlier this year about how SA’s retail industry is faring and whether consumers can expect food prices to come down this year.

Has there been any evidence of a consumer downturn at Pick N Pay?

We are mainly in food, but it has impacted on our clothing and general merchandise sales, which in line with other retailers, has taken a bit of a knock, in that there has been very little growth in those areas.

It’s fair to say that we are defensive because we are mainly in food but most of the resilience and positive growth that we’re reflecting is coming in real terms from space and in absolute terms from quite high inflation, which is at about 13% for the month of December.

Have you noticed that consumers are tending to purchase cheaper items?

I don’t think that that’s noticeable. I think people are probably entertaining at home more, and some of the trends do indicate that. If they are entertaining at home, I think the behavioural pattern is “if we’re going to stay at home, let’s at least do a decent job of that.”

So we’ve not seen a drop in expensive cuts of meat for example. What people are doing is buying a lot more wisely in terms of checking prices. In unit prices you can often get quite big price differentials, so while it may be counter-intuitive, a larger size pack is often more expensive per kg.

Are food prices likely to come down this year?

Definitely; I definitely think so, if the commodity prices stay down or go down further, and the fuel and oil price goes down further or even stays down. The big question mark is the value of the rand. If that were to strengthen, then there’s absolutely no doubt that there simply has to be a decrease in prices.

We’ve already seen it with some of the commodities. Maize meal, flour and bread for example, because of the wheat price having come down, and cooking oil is also cheaper than it was. So on those four items we’ve already reduced prices, because we were able to get reduced costs from suppliers. And I absolutely expect more of that, the one question mark being the dollar.

Why were maize prices so high when the commodity is produced in SA?

Maize meal is produced locally, but the price one pays for a commodity is based on the global commodity price. I guess the thinking is that if they can sell a particular commodity overseas for X amount of dollars, then why should they sell it here for a lot less. As a retailer, we have been complaining about that for years.

It also depends on the quantum of the cost that is applicable to the particular commodity. So with bread I think the wheat cost is something like 25% of your overall cost. If wheat were to halve then you can absolutely expect a decrease in the bread price.

But then you get other products like jam or certain canned fruits where the raw material is actually a small component because the packaging is more expensive. The process of canning – preparation, boiling, sterilising, pasturising – and the actual can itself, is a lot more expensive than the raw material.

In light of the current climate, is Pick N Pay proceeding with its planned store expansion?

We’re not going to hold back at all in terms of our normal developments. There’s usually a lag of 18 months to 3 years, so most of the time we would not be in a position to stop a development anyway. What we were looking at was accelerating some 2010 stores into 2009, and those we’ve said we are now going to leave until 2010, and there were only two of those that I’m aware of.

How is the convenience store joint venture with BP forecourts progressing?

What we’re doing is piloting two stores, one in Hout Bay and one in Tokai. We opened the one in the last week of November and the other in the first week of December. So when the holidays are over, we’ll evaluate how well they’ve done and decide whether or not we want to pilot a few more.

Is Pick n Pay still looking to expand into other African markets?

We’ve looked at Africa and we always do on an ongoing basis. We know that our competitor, Shoprite, has been very, very good in terms of their expansion. Of late Africa’s showing lots of potential and lots of formalising, which suits us (Pick n Pay) better.

The obvious thing would be to rather grow contiguously as against leapfrogging. So that would imply Mozambique and Angola, because we already are represented in Botswana and Namibia very aggressively. And we have a 25% stake in Zimbabwean supermarket group TM.

So the obvious places would be Angola, Mozambique, Zambia, and we will look at others, and the chances are that we will have a store open by the end of this calendar year.

In light of the retail bankruptcies in the UK, do you think SA will weather the current storm better?

From a consumer market point of view, we’d already had a couple of blows in 2008 and even a bit earlier. Two of those were the National Credit Act (NCA) which already had the impact of making credit a bit harder, and high interest rates and high inflation.

Those things were already putting a dampener on retail sales growth, so when the credit crunch hit the northern hemisphere we were buffered to some extent because we’d already had some.

The other factors are that developing markets generally pick up quicker than developed markets, and the fixed-investments such as the Gautrain and other big infrastructure projects are constantly injecting spending power into the economy, so I think they’re a very good thing.

It probably should have been done many years ago, but the impact of it now is that it is also going to be a cushion. So I think good fortune might make things a lot less painful for us in 2009.

So do you think 2009 will prove to be a better year for the retail industry and consumers?

Yes, I think there’s a lot of potential good news for consumers.