Finweek English Edition - - FRONT PAGE - BY SHOKS MZOLO

In a highly com­pet­i­tive re­tail in­dus­try, Botswana’s Chop­pies su­per­mar­ket chain, founded in 1986 as a sin­gle store in Lo­batse, south of Gaborone, stands out.

With a net­work of 125 branches – about two-thirds in Botswana and the rest in South Africa and Zim­babwe – the group has seen sub­stan­tial growth in re­cent years, with rev­enues in­creas­ing by a com­pounded an­nual growth rate of 27% from June 2011 to the end of June 2014. It re­ported a gross profit mar­gin of 21.5% last year, com­pared with Shoprite’s 20.41%.

Chop­pies, whose l ead­er­ship in­cludes co-founder Farouk Is­mail, and for­mer Botswana Pres­i­dent Fes­tus Mo­gae, en­tered Zim­babwe t wo years ago (Shoprite left the coun­try in 2013), and plans to ex­pand to Namibia and Zam­bia this year. It is also set to soon en­ter the Tan­za­nian mar­ket, a coun­try Shoprite quit in 2014 af­ter years of losses. Ot­ta­p­athu is con­fi­dent that his team will make it where Africa’s largest gro­cer failed.

“In the case of Tan­za­nia, I don’t think Shoprite was putting the kind of ef­fort they’re putting in in Zam­bia. Had they put in that kind of ef­fort in Tan­za­nia, they would have made it,” says Ot­ta­p­athu.

Chop­pies’ f irst ven­ture out­side South­ern Africa is in Kenya, where it an­nounced in June it will buy l ocal reta i l er Uk­wula, with 10 stores in the coun­try, for $10m. While ac­knowl­edg­ing that it won’t be smooth sail­ing, Ot­ta­p­athu is pos­i­tive about tak i ng on Kenya’s Nakumatt and Uchumi su­per­mar­ket chains in their East African back­yards.

Ju­naid Bray, an­a­lyst at Ar­gon As­set Man­age­ment, warns that repli­cat­ing Chop­pies Botswana’s s uc­cess i n neigh­bour­ing mar­kets will prob­a­bly prove a lot more chal­leng­ing, given higher for­mal food re­tail­ing pen­e­tra­tion es­pe­cially in SA, he says. Chop­pies’ SA busi­ness re­ported a pre-tax loss of 28.5m pula ( R35.5m at cur­rent ex­change rates) in the six months to end De­cem­ber.

“Ex­pan­sion into new mar­kets is likely to place more pres­sure on man­age­ment, which may re­sult in them los­ing fo­cus of their core Botswana mar­ket, which


still gen­er­ates around 90% of prof­its,” Bray ar­gues. “On av­er­age, new stores t y pi­cally take bet ween 12 and 24 months to break even. Given such an ag­gres­sive ex­pan­sion plan, a sub­stan­tial por­tion of Chop­pies’ store base will thus be loss-mak­ing in the next 12 to 18 months.”

Much as he com­mends the chain’s “strong man­age­ment who have built a strong track record”, Bray says in­vestors could ar­gue the stock is very pricey at cur­rent lev­els, and that its strat­egy is not with­out risk.

En­chanted by a mix of its past and its po­ten­tial, Chop­pies’ fan base has lifted the stock by 44% since its sec­ondary l ist i ng on t he JSE i n May, which al­lowed it to out­per­form the Food and Drug Re­tail In­dex com­fort­ably, ac­cord­ing to Bloomberg data. At the time of writ­ing, Chop­pies was trad­ing at around R7.08 per share, giv­ing it a mar­ket cap­i­tal­i­sa­tion of R9.2bn – still a long way short of Shoprite’s R95.4bn.

“At cur­rent lev­els, even some of the ini­tial Chop­pies bulls would agree that the growth is al­ready priced into the share price, with fur­ther up­side be­ing lim­ited from these lev­els,” Bray says.

While com­mend­ing the su­per­mar­ket chain’s ex­pan­sion plan as “a great vi­sion”, con­sul­tancy Antswisa Man­age­ment Group’s ex­ec­u­tive di­rec­tor Miye­lani Mkha­bela says it will take at least three years for the re­tailer to reach its goal of 200 out­lets.

“Chop­pies will need to fo­cus on both cur­rent mar­kets and new ter­ri­to­ries as de­mo­graph­ics dif­fer, high mar­ket and po­lit­i­cal risks, ex­ten­sive strat­egy for lo­gis­tics, train­ing of more re­tail man­agers and its staff com­po­nents.”

But Ot­ta­p­athu says the group, with 500 man­agers, has the ca­pacit y to achieve these goals. Adding four other coun­tries in just a few years, raises ques­tions of in­te­gra­tion. Will the group not choke? “Not at all,” he says.

Mkha­bela warns that its move into Kenya may not be easy, as com­pe­ti­tion is stiff and the in­for­mal mar­ket con­tin­ues to play an im­por­tant part in the re­tail sec­tor. But Ot­ta­p­athu says the f irm has a strong lo­cal part­ner and will also ben­e­fit from a grow­ing for­mal in­dus­try and a mar­ket of 45m peo­ple.

“[De­mand] is high,” he says. The World Bank projects eco­nomic growth of up to 7% for the next three years. “That should give an op­por­tu­nity for peo­ple like us to ex­pand,” he adds.

Ramachandran Ot­ta­p­athu

CEO of Chop­pies

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