CHOPPIES CEO ON GROWTH PLANS:
“WE WON’T CHOKE”
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
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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.
CEO of Choppies