HomeAnalysisSell the dogs and buy disruptors

Sell the dogs and buy disruptors


JORGE Paulo Lemann, co-founder of 3G Capital once said:  “I have been living in this cozy world of old brands, big volumes, nothing changing very much and you could just focus on being very efficient and you would be okay, but now we are being disrupted in all ways and we are running to adjust.”

Piggy notes that change has become the new normal and indeed company executives in today’s era should be worried. According to a report by Accenture Research titled Breakthrough Disruption, Embrace the Power of the Wise Pivot, the way we live today is driven by new innovations that we scarcely could have dreamt of a mere generation ago.

Consumers are now demanding more personalised and flexible services while business leaders are left to navigate an everchanging landscape. C-suite mentions of “disruption” during earnings calls, investor conferences and company announcements have also increased significantly over the past decade.

Globally, traders and investors have also been taking positions in disruptive and fast growing sectors such as artificial intelligence, electric cars and pharmaceuticals.

Looking at the Zimbabwean context, there is no sector that has been immune the merciless influx of disruptors.

A good example is how Cassava SmarTech’s EcoCash platform has disrupted the payments system in Zimbabwe. Cassava has managed to capitalise on the lack of M1 currency in the country through the EcoCash platform.

Piggy feels most banks in Zimbabwe “left money on the table” in areas relating to payment solutions. Mobile money has proved to be a “transformational” service that has brought financial services to the unbanked and has spread throughout the emerging economies at an unprecedented rate.

In general, mobile money services include:

  • person-to-person transfer of funds, such as domestic and international remittances,
  • person-to-business payments for the purchase of goods and services, and
  • mobile banking through which customers can access their bank accounts, pay bills, deposit and withdraw funds.

Cassava (EcoCash) has largely pursued a dominator strategy that implies controlling the whole ecosystem by eliminating all other species in their closest niche.

In other words, EcoCash determines the activities of the other species in the ecosystem. Furthermore, as a hub landlord, it controls the activities of the agents, banks, merchants and retailers in order to maximise value.

Dominators are the only source of innovations in their ecosystem and give little or no room for the other species to innovate. To demonstrate EcoCash’ dominance, Piggy applied the Herfindahl Index (also known as Herfindahl–Hirschman Index, HHI, or HHI-score). It is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them.

It is the sum of the squares of the market shares of the firms within the industry where the market shares are expressed as fractions. The result is proportional to the average market share, weighted by market share. As such, it can range from 0 to 1,0.

Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite.

Using market shares for mobile money subscriptions, the calculated Herfindahl Index for the mobile money industry in Zimbabwe is 0,87379 (0,93²+0.007²+0,059²), which shows that competition remains low.

Generally, mobile network operators (MNOs) have the advantage of bringing in a huge existing distribution channel that is normally far reaching than the branch institutions.

EcoCash, for example, was built on the Econet Wireless subscriber base. That said, there is nothing that stops an existing commercial bank in Zimbabwe from partnering with NetOne’s OneMoney or TeleCel’s Telecash.

Such partnerships would not only stir competition but can achieve synergies in management and research and development (R&D). Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts.

Advantages of synergy

Overall, the fact that EcoCash remains the dominant player in the mobile money space means that investors will continue to have a strong appetite for Cassava shares on the Zimbabwe Stock Exchange (ZSE).

The tech company has been active in rolling out new and relevant products that have been welcomed in different sectors that include agriculture, transport, logistics and health services.

Piggy likes Cassava’s asset-light strategy that taps into informal sectors. The company has also penetrated the insurance industry where it has grown its market share.

Overall, the investment case in Cassava lies in the optionality embedded in the technology-based business model. The company can easily build new technologies on its already established platforms allowing it to generate high returns from a light asset base.

The disruptive nature of FinTech globally and the rise of digital banks also warrants cements the Buy case. Learn more about investing and trading by downloading the SecZim Investment 101 Handbook from www.piggybankadvisor.com

Matsika is the head of research at Morgan & Co and founder of piggybankadvisor.com. — batanai@morganzim.com/ batanai@piggybankadvisor.com or +263 783 584 745.

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