Pick n Pay, Shoprite punt supply-chain optimisation

Expansion: Pick n Pay’s new Gauteng distribution centre, Eastport, will cost R2bn to develop, including land and construction.
With new store openings and a need for bigger and more efficient distribution centres, large retailers Pick n Pay and Shoprite have teamed up with Equites
Property Fund and Fortress Real Estate Investments to develop prime logistics facilities to optimise their supply chains.

In Gauteng, Pick n Pay and partner Fortress are developing a new distribution centre, Eastport, to consolidate the JSE listed retailer’s Longmeadow distribution centre and three smaller facilities. Marcel Basson, a retail executive at Pick n Pay Supply Chain, said the facility would be 45% larger than Longmeadow and with 50% more capacity and enhanced systems and layout. It is targeting a 12% decrease in the cost per case delivered over the next five years. “The Eastport distribution centre will support our growth ambitions by improving efficiency and reducing costs,” Basson told Business Day.

The facility would provide the capacity for the group’s store expansion plans by catering for future customer demand, he said. On completion of the Eastport distribution centre during the 2024 financial year, the group would have eight distribution centres with a combined capacity of about 377,000m² of gross lettable area. “Eastport will complete our centralisation process in Gauteng and further strengthen our strong supply chain and improve efficiency gains,” Basson said.
Furthermore, the facility will unlock huge benefits for customers — ranging from more competitive prices to better product availability as the facility enables the company to work with more suppliers.
With a gross lettable area of about 165,000m² and scheduled for completion in June, the Eastport distribution centre carries a cost of about R2bn, including land and

construction, with Pick n Pay’s 60% share estimated at about R1.2bn. Pick n Pay has an option to renew its 15-year lease agreement.

Bruce Collins, head of asset management at Fortress, said intensive capital was tied into developing bespoke distribution centres. Retailers wanted to control what they knew and what they were good at, so they outsourced this function to real estate specialists like Fortress and Equites. The two companies had strong balance sheets, making undertaking these huge logistics developments feasible. “Retailers see a better return on equity through investing in their business such as expansion, store refurbishment, better merchandise and staff training, for example,” Collins said.

With its biggest facility in Jet Park in Gauteng, the SPAR group prefers to own its distribution centres and leases space for overflow when needed. Woolworths outsources the distribution function to third-party logistics providers who lease facilities for this function.

Collins said South Africa was experiencing demand for logistics assets, and most of this activity was consolidations, as was the case with Pick ‘n Pay’s Eastport distribution centre. “For the [past] decade or so, SA has been transitioning from a manufacturing economy to a distributing economy. This deindustrialisation drives demand for distribution sectors as most of the imported stock is stored before being distributed,” Collins said.
SA was an enormous economy, he said, though growth was slow. However, the growing population presented opportunities for food retailers and demand for distribution centres.

To optimise its supply chain, Shoprite and Equites formed a joint venture partnership
— Retail Logistics Fund (RFL) in 2020 — in which Shoprite contributed a portfolio of distribution centres valued at about R2bn with Equites injecting cash of R2.1bn.

Shoprite wanted to optimise the return on investment, invest in higher-yielding retail projects and technology, provide both operational and capital flexibility, and form a strategic partnership with a best-in-class logistics property company in the country.
In December 2022, the fund announced two transactions — the sale, as well as the lease and development of a logistics campus for Shoprite in Gqeberha in the Eastern Cape — to meet distribution centre capacity in the province and ease pressure on the Shoprite Cape Town distribution facility.

KwaZulu-Natal Park

Last month, RFL said it would, through a sale and development lease agreement, spend R1.16bn on acquiring and developing a prime logistics park for Shoprite in KwaZulu-Natal. The fund will lease the existing park to Shoprite for 20 years with the right to renew for three additional 10-year periods, as well as extend the property for more than R422m. Equites’ interest in the Shoprite portfolio will be about R4bn on completion of all developments.

For the financial year ended in July 2022, the group said Shoprite’s supply-chain transformation would see the development of a new distribution centre capacity of more than 200,000m² in the next two to three years to complement larger distribution centres with smaller, nimbler and e-commerce-ready infrastructure.

“Our multiyear supply-chain expansion begins with the construction of the new 85,000m² Gauteng facility during the first quarter of 2023,” CEO Pieter Engelbrecht said. The group, with about 3,000 stores, will open 275 new ones in 2023, of which 220 are in SA — and it will continue to invest in and grow its core SA business.

Equites CEO Andrea Taverna-Turisan said with Shoprite’s new store openings, having distribution capacity was key to its supply chain. “To be successful in the supermarket business, you need product on the shelf, and to ensure that, you need to have the product in your distribution centre to supply to the store when needed,” Taverna- Turisan said.

Shoprite’s forward thinking in making the best of its supply chain enabled the group to win market share in the sector, he said. “Shoprite’s growth ambition and the decision to sign up four logistics projects with Equites is a reflection of the quality and value we offer in the market.”
JSE-listed Equites is a specialist owner and developer of prime logistics assets in SA and the UK valued at R26.3bn at the end of August. Its tenants are multinationals that are prepared to sign leases for 10, 15 and 20 years and who, given their commercial might, tend to meet rental payments on time. The Shoprite deal enables the retailer to optimise its supply chain and meet warehousing capacity from new stores.

Equities will grow its SA portfolio through high-quality acquisitions and developments and position itself as the logistics developer of choice.
Taverna-Turisan said Equites’ 13.9 years group weighted average lease expiry was expected to exceed this by 2025. SA, now at 13.3 years, would peak at over 14 years during the same period as the company focused on building resilience, particularly with Shoprite.

The 20-year triple net leases were a strong covenant in debt capital markets at a time when capital markets were tough for most property companies, he said.
A triple net lease agreement involves tenants paying all the running costs of the property leased such as maintenance, security, rates and taxes.

The development of more than 600,000m² of distribution capacity would more than double the size of Shoprite’s warehousing capability, Taverna Turisan said.
“Given the group’s expansion, I wouldn’t be surprised if Shoprite would want to put distribution centres in strategic localities in phase two based on store footprints which will further ease pressure on distribution centres,” he said.

Mhlanga, D. (2023). Pick n Pay and Shoprite say supply chain optimisation is key to store expansion. Available from:

Question 1

It is evident from the article that capacity planning is an integral component of Pick n Pay’s supply chain strategy.

Identify and justify which capacity planning strategy Pick n Pay has adopted and discuss any two (2) positive and any two (2) negative implications of this strategy. (6)

(Mark allocation: 2 x 1 mark for the justification of the strategy and 2 x 2 marks for the implications)

Question 2

To remain competitive within the retail market, Pick n Pay needs to ensure that it renders a high level of customer service at all its outlets within the context of its logistics processes, systems and support. However, in order to achieve this, it also needs to ‘go back to basics’ in terms of its logistics strategy.

Provide a detailed logistics strategy, outlining three (3) fundamental components that Pick n Pay should consider should it want to ‘go back to basics’ and provide five (5) factors or examples that you believe are relevant for each component. (15)

(Mark allocation: 3 factors x 5 marks for the detailed discussion)

Question 3

According to Marcel Basson, a retail executive at Pick n Pay Supply Chain, “Eastport will complete our centralisation process in Gauteng and further strengthen our strong supply chain and improve efficiency gains”.

Appraise this statement in the context of the value that centralisation, as opposed to decentralisation of the warehouse function, offers Pick n Pay.
Provide two factors for each approach. (4)

(Mark allocation: 2 factors x 2 marks)

Question 4

According to the article, Woolworths outsources its distribution function to third-party logistics providers.

Critically evaluate the pros and the cons of both outsourcing and insourcing the logistics function for Woolworths. Provide a detailed discussion of two (2) pros and two (2) cons for each strategy. (16)

(Mark allocation: 8 factors x 2 marks)

Question 5
Logistics contracts are an essential determinant to the success of any outsourcing agreement. Many potential pitfalls exist that need to be avoided when these contracts are being drawn up.
Assist Woolworths by proposing and elaborating on any three (3) guidelines that it could implement to ensure that its outsourcing agreements are successful.
(9)
(Mark allocation: 3 guidelines x 3 marks)
Question 6
Central to both Pick n Pay and Shoprite’s supply chain strategy is the primary objective of being as efficient as possible in all their supply chain operations.

Prepare a report addressed to the supply chain director of either of Pick n Pay or Shoprite wherein you highlight and discuss the areas within which it could improve its overall efficiency within these four areas. Your report should include the headings below:
1. Warehouse management (5)
2. Sustainability (10)
3. Inventory (5)
4. Transportation (5)

No introduction or conclusion is required for your report.

(Mark allocation: 25 relevant facts x 1 mark)

Answers to Above Questions on Pick n Pay Case Study

Answer 1: An analysis on the given case study on Pick n Pay indicates that the company has developed a new distribution centre in Eastport, Gauteng, and this is aimed at further consolidating its existing distribution centres and smaller facilities. This indicates that the company has adopted a consolidation and expensive strategy, and this particular strategy has significant positive as well as negative implications. When it comes to positive implication, this particular strategy is beneficial in achieving cost efficiency in the operation, and it is also beneficial in achieving improvement over the operational activities of the company. However the negative aspects are also there and this particular strategy requires significant investment.

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