Sean Summers’ return to PicknPay brings hope. Unlike mere financial engineers, he’s a seasoned operator. Following in Raymond Ackerman’s footsteps, he transformed the company. Ackerman’s strategy of low-margin, high-ATO sales, with a cash focus, reaped returns. Summers faced challenges in the ’90s but boosted ATO, ROS, and ROAM, propelling market value. Recent struggles tie to a delayed SAP system and IFRS16. While critics focus on accounting profit, Summers prioritises cash, emphasising the Cash-to-Cash Cycle. This approach, akin to Boxer stores’ simplicity, could be PicknPay’s key to success in a complex African business landscape.
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By Ted Black
It’s good news that Sean Summers is back at PicknPay’s helm. He’s a well-seasoned operator, not a “financial engineer” or “professional” manager. ___STEADY_PAYWALL___
A reason given for the late Raymond Ackerman parting ways with Greatermans sixty years ago to start his own business was he ran stores at too low a sales margin. He differed in one way from the entrepreneurial maxim: “Buy low, sell high, collect early and pay late!” He sold low with a cash strategy in mind.
He knew “low margin” sales are very good business when you multiply them with high asset turnover (ATO), so he designed his firm to generate more than R5 in sales for every Rand of assets. The result was Return on Assets Managed (ROAM) of around 15%. He not only made money – profit – but generated cash. So much of it, he effectively owned a bank.
Because of union unrest, the early 1990’s were troubled years for the firm. When he asked Summers to take the helm in 1996, ATO had fallen to 4,7 and the EBIT ROS margin to 1,5%. ROAM was 7% but Cash ROAM 23%.
Twelve years later, in 2007, ATO hit a high of 5,9. ROS was 3,3% and ROAM 18,7%. Cash ROAM was 30%. The results show he walked in Raymond Ackerman’s shoes. Market value rose from R1,3 to R16 billion and made a big impact on a Rand of shareholder equity:
It went from R2,80 to R17,20 in 2006. It’s now around R5.00 even though equity has fallen from a high of 28% of tangible assets in 2002 to 7% today.
It may be coincidence, but in 2005 the firm approved a SAP system. It took six years to install instead of two. Assets grew faster than sales, and productivity plunged to where it is today – also pushed further down by the introduction of IFRS16 in 2019.
Intangible, “Right of Use” assets reduce ROAM by a few percent but have nothing to do with management’s competence. Indeed, any entrepreneurial manager knows it makes strategic sense to control some needed assets instead of owning them.
But are the half-year numbers as “awful” as Summers and Alec Hogg said on Biznews last October? Their focus, like most PnP’s critics, was on accounting profit. What about cash?
Before dividends and tax, Cash profit was R3,2 billion making for an 18% Cash ROAM. “Paying late” seems to explain it, but takes us to a critical number – one that could best measure the changes Summers says he needs to make.
Often, the cry in a turnaround situation is “back to basics”. That means firstly getting store people to behave in a way that makes it easy for customers to buy from them. Secondly, it’s to work with suppliers to get the right stock to “spin” through the business. How well you perform these tasks speeds up the “Cash-to-Cash Cycle” and generates cash.
The chart below shows how well managed the cycle was in Summers’ time as CEO. Given his stress on buying, he must have influenced the downward trend before that. Could that be one good reason why Ackerman appointed him in the first place?
The first cause of an increased need for cash is declining stock and debtor productivity.
The decline started in 1996 but gathered pace after 2005. Stock ATO, the main driver, fell from a high of 18,6 to 10 in 2023 and Debtors from 50 to a low of 20.
The second reason for a climbing need for cash is to do with suppliers and “paying late”.
With Summers in charge, money owed to suppliers was never less than 150% of the value of inventory and debtors.
People say suppliers’ cash is “free”. It isn’t. There are always hidden costs if you have soured relationships with them but need just-in-time deliveries. You can’t screw them on price and then find all kinds of reasons not to pay on time. The key is to turn stock as many times as you can before you must pay. Suppliers can help you do that.
In the UK in 2022, ALDI with less than 5% of the big retailers product lines and 90% being own-brand, turned its inventory 29 times at a 1% ROS. Cash ROS was 4%, Cash ROAM 10% and Cash ROE 19%. Their Cash Need was -6,9% of sales with trade payables at 190% of stock and debtors.
Every business has a critical number. It may differ as conditions change but once defined, a task-driven, on-the-job, just-in-time, education programme to improve it grows the people involved faster than any useless “training” activity like a DEI workshop. Everyone with a stake in the business benefits – customers, suppliers, employees, owners and society at large.
Ask your people what they think the number is. Incentives for top management will have them focus on EPS and share price – not asset productivity.
The rest will trot out sales, profit margin – usually “GP” – or even pluck one from a host of “key performance indicators” they think important. The few, truly effective managers will have a physical productivity ratio in mind. One that generates profit and cash.
Could the Cash-to-Cash Cycle be the one for Sean Summers and PicknPay? And could Boxer stores with only 3000 product lines instead of 18 000, be a blueprint for the future?
In the hostile environment we have for value creation, we need to design simpler business firms, not make them more complex – especially in Africa.
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- Steinhoff’s downfall: Ignoring strategic principles and the perils of asset intensity – Ted Black