Batanai Matsika
We recently attended the OK Zimbabwe’s AGM and management gave a brief trading update for Q1 2019. Overall, the retailer continues to register strong growth with revenues up 20 percent on the quarter. Thanks to the increased usage of electronic and plastic money! The recent 1H 2018 Zimra report also confirms this given that Net VAT on Local Sales increased 32.8 percent y-o-y as a result of the increased usage of electronic and plastic money. We also attribute the growth to increased informal sector activity in the broader economy as well as the impact of promotions such as the OK Grand Challenge.
Management also indicated the retailer had maintained its gross margins (c17 percent). OK Zimbabwe is a low cost player and when compared with other food retailers, its gross margins are lower given the company’s policy of investing in price rather than booking gains at gross margin level. In terms of operations, the retailer experienced erratic supply of some goods as a result of forex shortages. However, the supply situation is improving and management expects to meet sales targets for the Q2 2019. In terms of capex, the business is looking to open a new OK store in Harare by mid-August. OK Zimbabwe is also looking to open a branch in Karoi after striking a land-deal with the Anglican Church. We reiterate that the low penetration of organised retail chains in Sub Saharan Africa (including Zimbabwe) presents a significant opportunity for players such as OK Zimbabwe. We estimate that ‘modern grocery retail’ accounts for only 22 percent of grocery distribution in the region, the rest reaching customers through informal channels. The food retail sector should prosper as structural dynamics play out: rapid urbanisation (shopping mall concept), population and economic growth.
In the developed world where IoT (Internet of Things) and Industry 4.0 has taken centre stage, the online grocery shopping concept is gaining momentum. Global retail giants like Walmart have dominated the sector with well-developed supply chains and buying power which enable them to maintain decent profit margins. However, this concept could take some time to be fully developed in developing countries such as Zimbabwe. Whilst online grocery companies save on rental costs, adding the logistics cost to process and deliver groceries to each customer makes the unit economics unattractive.
Overall, OK Zimbabwe remains a top quality company with a sound business which manages to combine strong revenue growth with attractive returns based on high capital turnover, efficient capex and a low cost structure. Despite the entrance of new players in the food retail space, OK Zimbabwe remains a leading player in the space. The retailer operates in three different main formats: OK Stores, Bon Marche and OK Mart, selling groceries, basic clothing and textiles as well as house products. The different formats also allow the company to cover all socio-economic groups of the population.
Author – Batanai Matsika
Head of Research – Akribos Research Services
+263 78 358 4745
batanai@akriboscapital.com
