In the mid-90s, OK Zimbabwe was the major force in the retail business, with its closest competitor being TM Supermarkets and to a much lesser extent Lucky 7.
By Kumbirai Makwembere
Well-known for its marketing promotions, among them the OK Grand Challenge that had the buy-in of many corporates in manufacturing, the chain had superior product offering and commanded a large market share.
However, the hyperinflationary environment that kicked in from 2000, the price blitz of June 2007 and stiff competition from new entrants in the form of Spar, Food World, Food Chain, Town & Country and Afro Foods resulted in OK losing its grip on the market.
If anything, the pendulum now swung in favour of grocery retailers in informal circles and as such they were performing far better than the larger supermarket chains.
A quick look at the interim results for OK for the six months ended September 30 2012 seems to suggest the good times are back for the supermarket group. Earnings attributable to shareholders came in at US$4,9 million, equating to a 26% growth over September 2011 levels.
Revenue jumped 24,6% to US$231,1 million outpacing the 4,4% growth in GDP that government is projecting for 2012.
Management attributed the jump in sales to growth in market share as its main competitors are struggling. Currently the company is undertaking refurbishments at its supermarkets and this has resulted in increased traffic evidenced by a 22,8% growth in sales per square metre.
Bon Marche Avondale, OK Marimba, together with OK Fife Avenue, were spruced up over the period. Furthermore, OK has been aggressive in looking out for new spots, the Victoria Falls shop being the latest addition. Plans are also in place to open a new outlet in Hwange and refurbish shops in Chinhoyi, Kadoma and Lobengula in Bulawayo.
Gross margins came off slightly to 17,01% from 17,06% in 2011 due to increased costs of utilities. Moreover, electricity supplies were also erratic, forcing the group to make use of generators.
Additional expenditure was incurred in installing CCTV so as to reduce pilferage. This resulted in shrinkage declining to US$1 million, down from US$1,2 million. However, in percentage terms shrinkage went up from 0,7% to 0,8% but remained below the company benchmark of 1%.
As a way of broadening income streams, the company recently obtained a money transfer agency licence and it will be offering this service in partnership with selected banks. This makes sense considering the large branch network, currently standing at 53 outlets, the retailer has in Zimbabwe. This is good innovation on the part of management and is in line with trends the world over. It will go a long way in encouraging consumers to spend more at OK outlets.
It is beyond doubt OK is currently sitting on a strong position and the future seems bright for the group. Other retail chains, namely Town & Country and Afro-Foods, have evidently failed to adapt to the dollarised environment. Spar stores continue to record losses and the bulk of them are not adequately stocked. It is widely believed there is a high rate of shrinkage within Spar.
Pick n Pay through TM, on the other hand, has taken too long to roll-out. However, we should not completely write off Pick n Pay as it is a big player in South Africa. Business management is obviously doing strong work in the background.
To counter this, management at OK is promoting its in-house brands; namely, Shoppers’ Choice on the groceries side and Top Notch for general merchandise.
The OK story is an example of money put to good use. Back in 2010, OK raised US$20 million through a combination of a rights issue (US$15 million) and US$5 million from convertible debentures. Funds raised were earmarked to stock shops adequately and refurbish outlets as well as expand the company’s retail footprint. Two years down the line, the company has achieved this.
Shareholder value has also grown in the process. The company currently has a market capitalisation of US$149,6 million, 121% above the US$67,8 million prevailing in March 2010 when the capital raise was undertaken. Also encouraging is that borrowings have been kept to manageable levels of US$10 million, with the debt to equity ratio currently at 20%.
OK recently accessed US$5 million from Investec in line with the 2010 agreement when Investec underwrote the company’s rights issue. Money from Investec is being channeled towards outlets refurbishment.
A further US$5 million was accessed from local financial institutions to facilitate importation of merchandise from Asia which has to be paid for in advance and has a lead-time of three months. The working capital cycle should be closely managed or borrowings will end up choking the business in the form of increased finance charges. In the six months under review finance costs jumped from US$1 504 to US$395 382.
What is worrying however for OK is their cashflow position. In the six months under review, operating activities used up US$2,2 million compared to US$2,7 million generated over the same period last year.
Management also indicated they borrowed money over the period under review so as to facilitate imports from Asia. It is therefore evident business is still in need of more funding and the cashflows are not yet strong enough for the board to have declared a dividend.
After such a strong performance we do not believe management were under pressure from shareholders to declare a dividend.
Going forward, management disclosed the company life cycle had reached saturation stage and that growth will emanate from opening new outlets and growing market share.
This, however, will not be easy considering supermarket chains such as Spar and TM are currently developing strategies to regain the market share lost. Margins might also come under pressure owing to increased competition and the protectionist measures introduced in the 2013 national budget.
Furthermore, the company is exposed to fluctuations in the rand since 65% of the company’s general groceries are coming from South Africa.
However, the short-term outlook for the South African currency is weak and this will benefit OK.