The retail sector, similar to other sectors, has adversely been affected by the softening aggregate demand in the economy. Furniture, clothing, food and other factions within this broad sector affirm to this notion as resembled by subdued turnover and earnings performance for most listed corporates such as Edgars, Truworths, Innscor, OK Zimbabwe, Meikles, just to name a few. Whilst consumer demand has been weakening, competition has concurrently accelerated with most central business district (CBD) offices converted into either food or clothing boutiques.
A fortnight ago, Choppies Zimbabwe extended its footprint in the country by opening two outlets in Harare’s CBD.
These two outlets which took its total stores to 16 saw the group invading Harare for the first time since its inception. The group intends to open two other outlets in the coming weeks at Highglen and Queensdale. Choppies Zimbabwe is a joint venture between Botswana’s Choppies Enterprises and the Mphoko family with the group having entered Zimbabwe through the acquisition of 10 retail stores under Sai Enterprises and Chrissfontein Marketing in Bulawayo. The group plans to expand all over the country over a phased period of between five to ten years. Their five year target is to have 40 stores with annual turnover of US$300 million expected.
While welcoming the expansion programme that Choppies Zimbabwe is pursuing, the retail space will mostly likely change going forward. This also comes on the back of another new entrant Meikles Mega Store expected in the short run. For households, such positive developments broaden their choice of products and services. In addition, more players will allow consumers to be able to assess price differentials. Subsequently with disposable income growth being stagnant or declining, consumers will have a wider platform to purchase goods and services from competitively priced retailers.
To retailers, the entry of new players implies the greater need to differentiate themselves against peers in the fight for every dollar in the consumers’ pocket. Price competition will probably become one focus area whereby prices might be reduced as a way of attracting more consumer feet.
Profit margins will ultimately remain under pressure as the current fragile consumer demand has seen most players recording negative revenue growth rates. Of major concern is the fact that the retail business has always been a low margin business, as such additional margin pressure, could result in lower profits or even losses being recorded. For instance, OK Zimbabwe in its interim financial results to September 30 2014 reported a profit of just US$4.3 million from a turnover of US$232,1 million. On a year-on-year basis, after-tax profits declined by 11% whilst revenue was down 4%.
Innscor Africa Limited has also been another victim as its profit margins have shrunk in the bakery and fast food business due to the ever increasing competition. In the fast foods space, Chicken Slice has presented fierce competition. Lobels and Proton on the bakery business have made life difficult for Innscor with other retailers such as OK Zim, Pick and Pay and Spar also producing their own bread. In essence, a bumpy ride awaits most retailers in the short-to-medium term assuming aggregate demand in the economy remains feeble.
Another strategy that retailers can use in minimizing the downside risk of rising competition and weak demand is that of pursuing strict cost management. Enhancing efficiencies specifically in procurement as well as close monitoring of shrinkage levels will play a significant part. OK Zimbabwe is one of the few examples companies that have pursued this strategy consequently creating value for shareholders.
This was achieved through centralising procurement and also enhancing security as a way of managing shrinkage to minimal levels. This role nonetheless does not only apply to retailers but to all corporates as strict cost management has to a greater extent been a game changer in a dollarised environment.
Overall, the sector’s fortunes hinge on the recovery of the economy most importantly if aggregate demand is revived. Within the current economic landscape, food-oriented retailers might be more resilient relative to non-food retailers. This notion is premised on the fact that consumers are now focusing more on meeting basic food stuffs whilst other areas such as clothing, furniture or electrical appliances are to a greater extent viewed as “luxuries” due to economic hardship.
At country level, despite the government’s resolute efforts to curb the import bill, Zimbabwe will remain a net importer for both consumptive and capital goods. This is because the treasury has for a long time been crafting ways to arrest symptoms rather than addressing the real issues facing the nation. Reducing imports without capacitating local producers through providing affordable, long-term capital and a business friendly environment will not result in the attainment of broader economic goals. Therefore as long as local production and capacity utilisation remains subdued, imports will continue to flood the economy ultimately widening the current account deficit.