Pep Stores is an Every Day Low Prices variety store for family life essentials. They sell clothing, footwear, home-ware, baby-wear, school-wear, health, beauty and wellness products, cellular products, insurance policies, etc… Pep has more than 1600 stores, making it the biggest single brand chain store in Southern Africa (Angola, Zambia, Zimbabwe, Mozambique and Malawi ), Poland and Australia.
The company started in 1965 with a clear vision and evolved over time into a multinational that sells 500 million products through 220 million customer transactions every year. As described in the case study (2010) Pep has been impacted by many major external factors influencing many internal changes.
Aims and objectives
This report consists of five main parts. It will begin with the identification of Pep Stores external factor analysis using PESTEL. Next it will be a SWOT analysis to not only analyse external factors but also their influence internally, a 5 Forces assessment will complete the analysis. Only then we can have an appraisal of the company’s strategic development over time and a conclusion.
In order to evaluate the issues at play in the Pep Stores case and discuss its strengths and weaknesses in responding to key strategic paradoxes, it is necessary to apply different techniques to assess both internal and external factors shaping Pep Stores strategies.
As David, Campbell and Craig (2005) write, “The activities of competitors, suppliers and customers will often mean that an organisation will have to implement changes.”. The PESTEL framework, even if it is an aid to identify factors and not a rigid “tick in the box” exercise, will help analyse the external factors generating changes in the industry or the environment of a company. This framework will also be a main input into the SWOT analysis as Threats and Opportunities represent the external factors in that analysis.
o Apartheid played a major role in Pep Stores development as the vision of Renier van Rooyen was to target the masses.
o Release of Nelson Mandela and anti-apartheid sanctions brought uncertainty and recession in the country in the 1990’s.
o Apartheid got abolished and democracy took place changing in depth the socio-economic behaviour in the country.
o Poor people with little disposable income can have a massive collective buyer power.
o 1990’s showed adverse trading conditions.
o Arrival of cell phones on the market drove the customers to devote part of their income on something else other than clothes.
o At the start of Pep Stores, “coloured” people were mainly living in rural areas.
o The vision was to give “dignity” to the masses by offering decent clothes at a low price.
o Population migrated more to urban areas in the 1990’s.
o Customer base becomes more sophisticated and shop differently e.g. they go to malls instead of independent shops.
o Implementation of new systems to track stocks, customer needs at store level, etc…
o Selling of airtime electronically for cell phones.
o Operational efficiencies are technology-driven.
o Pep Stores are more involved in giving back to the community through corporate social investment.
o Competitors are developing sustainability plans and reporting e.g. Central Textiles, H&M, GAP Inc., M&S, etc… (csr – reporting 2011)
o Apartheid legislation had a big impact on Pep Stores as the customers were treated as second class citizens.
In their guide to Project Management (2008), Fox and van der Waldt state that while a PESTEL analysis measures the market through external factors, the SWOT analysis will measure a business unit, a proposition or an idea.
The goal of the SWOT analysis with PESTEL as input for Threats and Opportunities is to generate strategies for improvement (Basu 2008). This will help to or consolidate strengths by using opportunities or transform weaknesses into strengths or even mitigate the risks identified in the threats.
o Van Rooyen had a strong vision to be implemented.
o Diversification of activities vertically and horizontally leading to acquiring other chains in retail food and non-food, manufacturing and property.
o Agility to focus on urban areas while consolidating in rural environment in the 1990’s.
o Reviewed new vision, mission and values at the end of the 1990’s to revitalise the company.
o Strong corporate culture (Sikhula KunYe).
o Learning culture.
o Flat organisation.
o Diversity did lead to a loss of focus.
o Original vision was not followed in the 1990s diverting customers elsewhere.
o Image had to be modernised as it was perceived as cheap by the customers base.
o Shop locations (switch from rural to urban then to malls has been necessary).
o Cost cutting drove lack of marketing spend.
o Cellular phones arrival on the market.
o Abolition of apartheid.
o Acquisitions opportunities.
o Pep is not really challenged in the rural area.
o End of 20th century Pep was considered as cheap.
o Shopping habits change over time from rural to urban and to malls.
o It is important to differentiate yourself on the discount retailer market.
o Recession in the 1990’s.
o Customers who are not only looking at price or a combination of price and quality are also going to competitors
Internal and external factors have now been identified with these 2 analysis. To complete the analysis, a look at the operating environment is necessary as it will show the relationship with suppliers, customers and competitors but also assess the threats of new entrants and substitutes.
According to Porter the 5 forces analysis will determine the level of competition in an industry and so its potential benefits.
• Threat of new entrants:
o Pep is not really challenged in the rural area.
o There are a large number of national players, as well as independent stores, in the retail clothing market such as Edgars, Foschini, Woolworths, Truworths, Jet, Markhams, Queenspark, Clothing City and Mr Price.
o To compete in this sector, it is necessary to have high stock levels, branded products, the right location, good marketing and competitive prices.
• Threat of substitutes:
o Customers who are not only looking at price or a combination of price and quality are also going to competitors.
o There is indeed competition but no real substitute per se as Pep Stores sells basic items to the masses.
• Bargaining power of suppliers:
o Vertical consolidation of activities to ensure distribution costs reduction and higher flexibility in demand management.
o Pressure on suppliers to deliver better quality and cheaper.
o Diversification and horizontal consolidation of the retail businesses in the hands of Pep Stores (Blue Sky, Pep Home-ware)
• Bargaining power of buyers:
o Bargaining power of individual buyers is low but collectively it will impact the industry behaviour.
o Customers left the stores end of the 1990’s as products did not have the image they wanted for their clothes.
• Competitive rivalry within the industry:
o This is a highly competitive market and so the rivalry is high as there no substitute and the degree of differentiation is relatively low.
o In the 1990’s the competitors started to make credits for lower income population.
o Loss of focus did let competition enter and grab market shares.
Having now a clear view on the market, external and internal factors, it is feasible to identify the different strategic issues Pep Stores has or has had.
Company’s strategic development over time
As defined by De Wit and Meyer (2004), “strategy is a course of action for achieving an organization’s purpose” therefore we have to firstly define the organisation values. Pep Stores’ values are “Honesty, Passion and Resourcefulness, the vision is: Delighted customers: our focus and pleasure and the mission is to strive to be the friendliest and most exciting retailer offering up-to-date and durable products at the best price” (De Wit and Meyer 2010).
The core values have been key to implement a deep and influencing corporate culture that serves not only the core values of the company but also the cultural values of where Pep Stores operates. The culture has always been there from the beginning in 1965 with a clear vision from Renier van Rooyen, but in the 1990’s most major environmental changes took place e.g. recession, abolishment of the apartheid, population migration to urban areas,… Pep Stores at the same started to lose focus till 1998 when a new Management Director had been appointed. He delivered a new vision/mission statement and raised the corporate culture as a process to boost the staff and deliver the mission. Sikhula KunYe, a people centered corporate culture, was implemented i.e. less formalisation and less centralisation (Harrison and Handy matrix). As described in her cultural notes (2009) Dr. Y Turner states that “Geertz began to popularize the idea of culture as a kind of social programming process which acts as a basic building block for all social groups” and this is exactly what Labuschaigne implemented in Pep Stores: culture as a control mechanism and re-organisation e.g. flatter organisation and more decentralised decision-making.
As the 5 Forces analysis shows, the market is such that Pep Stores had to evolve over time due to these forces. In order to answer the external influences and also responding to an organic growth, the company started to diversify its portfolio, not only to spread the risk, but also to integrate vertically first to have a better grip on the supply chain (manufacturing) and horizontally by acquiring companies in other domains than clothing and also by developing new products e.g. cellular phones market. To be a bit more granular in the portfolio analysis, we could refer to the Boston Consulting Group matrix and check each family of goods and services but for this specific exercise (limited length) we can try to consider Pep Stores as one single entity and state that, as the market share of the company is high (Southern Africa being the reference i.e. Poland, Australia and The UK are purposely omitted) and as the product-mix is really diverse i.e. some are subject to growth and some are not, may well plot Pep Stores at the top of the growth of the cash cow quadrant and around at the middle in terms of the market share axis in the same quadrant. This would mean, according to Berkowitz (2010), that, even if the market is maturing, the company is able to retain a strong market share and that they generate a significant cash flow, and, when the shares are dropping, consolidation strategies have to take place as demonstrated in the 1990’s. It is also remarkable to see that Pep Stores has worked since its creation on acquiring other companies to increase its portfolio from clothing, to adding food retailing then moving overseas, and so even when the times were critical in the 1990’s. That also shows they realised that they could contain the bargaining power of suppliers by integrating the supply chain and the bargaining power of the buyers could be controlled by revamping the corporate image while there are almost no new entrants as the conditions are not easy to fulfil and there is no substitute per se.
Pep Stores also worked in turning weaknesses into strengths by implementing new strategies, when the population migrated to the cities, Pep Stores created new stores in cities and shopping mall to reach a 60/40 locations-mix to meet customers’ needs. They also could adapt their image to meet the demand, as the customers were perceiving the stores as obsolete and cheap, and so refocus the company on new vision/mission statements e.g. R1BOP mission (increase sales and reduce costs to achieve 1 billion of operating profit) or bringing marketing and advertising back in house to reposition the brand. They also consolidate strengths by using opportunities when they decided to enter the cellular phones market, diverting part of customers’ budget or acquiring other companies to integrate horizontally. Being aware of the threats, the company could mitigate the risks by implementing the right strategies as explained above.
In conclusion, reading the different analysis, it appears that Pep Stores has been through a lot of changes in its environment leading to major strategic modifications of the company. The company has shown ability to review and adapt its strategies to maintain not only its presence on the market but also its efficiency and ultimately its results and profits. We can say that a Kaizen management type is in place and so a culture of continuous improvement demonstrated its effectiveness since 1965.
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