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Hosting Ahmadinejad an own goal –– analysts

This would suggest that all is now well in the retail industry. Things have definitely improved much but to differing extents for different market players. It is interesting to note what  it is exactly that separates the bigger operators.

Two of the biggest and longest serving retail players, OK Zimbabwe Limited and TM Supermarkets, recently released their full year financial results, the latter as part of parent company Meikles’ results. These results not only show that the two retail giants are facing different fortunes but also demonstrate how after the dollarisation of the economy in 2009, recapitalisation has been the key determinant of success.

The economic distortions characteristic of the days of hyperinflation created an environment where formal businesses found it hard to operate. Instead, most retail trade was transferred to the informal sector where streetwise traders were able to react quickly and capitalise on arbitrage opportunities without being bound by corporate red tape or strict adherence to the law.

 

For this reason both OK and TM emerged out of hyperinflation in pretty much the same state – hanging by a thread. Three years on OK is a thriving enterprise, with refurbished shops and an expanding shop network. TM, on the other hand, has had a lacklustre performance and despite many indications to that effect, is yet to roll out its promised Pick n’ Pay branded shops.

It was apparent after dollarisation that the two retailers had to recapitalise. OK was the first off the blocks with a US$15million rights issue in April 2010. It would seem that quick execution made the day for OK. Commentaries accompanying Meikles’ results from as far back as December 2009 show that the need to recapitalise TM was specifically mentioned even back then.

 

Perhaps actual implementation was delayed by the disputes which eventually led to the demerger of KMAL. Whatever the cause, TM’s delay gave OK a head-start which may now be very difficult to close in on. The latest financial results show that OK’s revenue growth of 60% was way ahead of TM’s 29% revenue growth. Moreover, in absolute terms, OK’s revenue of US$413million was 40% higher than TM’s. Given that the level of enterprise growth surpasses economic growth in general, it is apparent that OK has been growing partly by gaining market share from competitors, quite likely even from TM.

OK correctly predicted that retail business would move away from the informal sector and back into the formal sector. Where groceries were being brought in by runners who sourced them across the border, they are now being directly imported by large retail players. In fact, the decision to concentrate on refurbishments shows that OK correctly predicted the consumer’s preference for the ambience of the shopping environment and believed in it enough to prioritise it.

Another advantage that OK has had is perhaps avoidance of high debt. Whereas OK first accessed equity financing, the Meikles group borrowed heavily. Obviously, not all these borrowings were channelled to TM, but if some of them were, then that may be what is holding back the retailer. OK was able to negotiate with Investec for the debt portion of their funding structure to be delayed. This debt funding of US$5million has now been taken up, but given the level of profitability already achieved, repayment will likely be met comfortably.

So, how long will OK dominate and will TM have to contend with playing second fiddle? Definitely not! TM has roped in Pick n Pay to recapitalise operations and rebrand the stores. Although the rollout has been delayed more than once, it looks like things will finally go ahead, with Kamfinsa and Borrowdale as the first shops targeted for refurbishment. One advantage that the Pick n Pay brand will have is that while it will be relatively new in the country, most Zimbabwean shoppers are already familiar with it. Also, with the recent US$13million capital injection, Pick n Pay’s shareholding increased to 49%. For this reason, the company will likely be interested in taking a very active part in management. This will give TM access to retail expertise from a more developed market.

Retail margins are naturally very thin, especially in a competitive environment. Excessive debt will quickly erode profits and both companies will naturally be on the lookout for this. It seems an all-out ‘war’ is on the cards in the retail sector and at some point the two retail giants may have to compete on pricing. Should this happen, it will definitely be an added advantage for the consumer. In the meantime investors in OK will likely continue to enjoy decent dividend pay-outs while Meikles shareholders hope that their TM subsidiary catches up soon.

If no major shifts occur in the economy and the retail market, it is likely that retailers will all be forced to maintain shops that meet a certain minimum standard to attract feet into their stores. Once this is achieved, competition will come down to price and quality, and margins will be squeezed. In such an environment, smaller players will likely be priced out of the market. With low margins will come the need to watch costs diligently, especially finance charges and shrinkage.OK’s head-start seems to place them favourably in anticipation of this fight.

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