adminBusiness Editor
OK ZIMBABWE achieved limited growth in revenue in the six months to September 30 as the liquidity situation chewed into consumer disposable incomes. Group CE Mr Willard Zireva told analysts on Tuesday the group had reported acceptable revenue growth of US$243,6 million up 5,4 percent on last year.
Earnings were flat in an environment characterised by low inflation at 0,86 percent at the end of September and low estimated gross domestic product growth.
Mr Zireva gave a scary deflation rate saying internal procurement prices showed a deflation of -2,45 percent. “We are experiencing diminishing demand across all sectors and as a result revenue growth is constrained.”
A couple of factors had weighed down the economy and these include a poor agricultural season, high and increasing unemployment, increasingly tight liquidity and the period of uncertainty around the July 31 harmonised elections.
With all the factors at play Mr Zireva said the group’s profit after tax was steady at US$4,8 million while earnings per share were down to 0,43 cents from 0,47 cents after the shares in issue increased following the conversion of the US$5 million loan from invested. The group declared a dividend of 0,2c unchanged from last year. Controls over shrinkage continue to improve, which assisted the group in maintaining the gross margin at the same level as last year. Total operating expenses rose
The group’s outlets increased to 54 from 53 last year while the number of staff was at 3 920. Mr Zireva said the group is planning to open new stores in Mabvuku and Hwange. They are also planning to refurbish the Waterfalls and Bindura branches. There are also planning partial refurbishments for the Gweru and Mutare branches while the Houghton Park branch is up for expansion.
They are also working on diversifying into the region and negotiations are at an advanced stage. This initiatives are expected to grow their market share as well as target a greater share of the customer spend.
Comment: What concerns us is the slowing down in sales growth. Yes, sales would flatten out at some point and given that disposable incomes are not expanding there is really no room to grow revenues much more aggressively than they have in the past few years.
A natural development, but it does pose a challenge for the group. They need to grow their wallet share size of the consumers’ purse and expand beyond being a grocery brand.
The results mirror exactly what is happening in the economy in general and consumer facing companies in particular. The growth rates are in line with what Delta achieved. In HY2012 Delta recorded an 18 percent growth rate while OK recorded a 24,6 percent growth rate in HY2012.
The two entities went on to record similar growth rates this year with Delta recording a 5 percent revenue growth rate for the HY13 while OK Zimbabwe’s revenue growth rate for the HY2013 was at 5,4 percent.
It is the cost side that OK Zimbabwe is losing it in comparison with Delta. While Delta recorded a 12 percent growth rate in the bottom line OK Zimbabwe recorded a marginal decline.
I believe OK Zimbabwe should do better in terms of cost containment. One particular area is on its local expansion strategy.
There is a limit to the extent which the group will continue to grow sales and market share by opening new stores. Bear in mind this also has a bearing on the overhead and logistic costs so Mr Zireva’s team has thought about how to get more value out of the customers who walk into their shops, besides expecting them to buy milk, eggs bread and so on.
From the numbers you can easily see that adding new stores is actually not bringing in those margins any more. In fact, the margins are being reduced.
Given the stagnation in the local economy any further expansion drive in Zimbabwe could become a straw that breaks the camel’s back, so it is our opinion that the company should for now only focus its growth into other countries within the region.
Building a new business and growing it across the borders could be costly capex wise. This requires tact and a total understanding of local customs, culture, habits and buying patterns. The group should do its homework and market research very well before taking that giant step.
OK is the country’s largest retailer. Its grocery market share is slightly higher than its rivals. Obviously this is not sufficient to give it pricing power, but it does enjoy better economies of scale.
The company has been the innovator in expanding its market to the non-food sector; OK Mart stores, and money transfer services; geographic diversification is still a challenge and it’s hoped the stores they want to open would be sooner rather than later.
Online Reporter