Choppies� African offensive: Seven countries and still counting
Brian Benza | Friday October 13, 2017 12:38
BusinessWeek: Your recent results show continued growth in revenues and footfall but net profits seem to continue weakening. Is this part of the plan?
Ottapathu: The continued rise in revenues and footfall is a clear indication of our ability to operate in the African market where we have managed to establish footprint in seven countries in a short space of time. The group operates predominantly in commodity dependent markets, and despite the difficult trading circumstances, Choppies performed well in the last financial year. Balanced growth in revenue and gross profit was achieved. Our revenues for the year ended June 2017 jumped 20% to almost P9 billion and gross profit rose 30%. Net profit, however, dipped 9.5% to P77 million, but this is merely the drag-on effect of our aggressive expansion drive.
BusinessWeek: From the seven countries that you are operating in, how many are profitable?
Ottapathu: We are making profits in countries where we have had a presence for three years or more. That is in Botswana, South Africa and Zimbabwe. In the other four countries, we hope to breakeven by the end of the next financial year and we plan to continue adding more stores in our new markets as part of the company’s long term growth strategy.
BusinessWeek: By your own admission the costs of expansion knocked back your bottom line, any plans to enter new markets?
Ottapathu: Yes, before the end of 2017 we will be opening our first store in Namibia. The plan is to open more shops in that market with time, but we don’t have a definite number and timeframes as yet.
But we already have about seven leases signed in Namibia. Apart from Namibia, there are no immediate plans to venture into new markets, but we are always exploring for opportunities in the region.
BusinessWeek: From the countries that you already have presence, how many stores are you looking at adding, in which countries and at what costs, in the year to June 2018? Ottapathu: Our capital expenditure budget for the current year to June 2018 is at P300 million. We plan to add 40 new stores to the 217 stores we already have across the region. The bulk of our new stores will be opened in South Africa(13), Zambia(8), Kenya(4), Tanzania(3), Mozambique(3), Zimbabwe(2), Namibia(3).
BusinessWeek: How is the Botswana business in particular doing in view of reports of tepid economic growth and weakening disposable incomes?
Ottapathu: We still see growth in Botswana, but not at the same levels as before. In the year to June 2017, Botswana revenues grew by five percent. But this was all part of the plan of diversifying into other markets. From a peak of about 80% to 90% contribution to revenues a few years ago, the results for the year ended June 2017 show what Botswana’s contribution to the topline is now down to 42%.
BusinessWeek: For a few years the group was posting losses in the South African market, has the situation turned around?
Ottapathu: The last time we made profits in South Africa was at the initial stages when we had only a few stores in the North West province. In the last few years we have not managed to break-even in that market and this year was our first time to turn a profit. The South African business achieved an Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) profit of 1.17% compared to a loss of 2.81% in the previous financial year and reduced net losses by 55%.
The acquisition of a further eight stores in KwaZulu-Natal is being negotiated, which, if concluded, will be complementary to our current business and will bring significant operating synergies.
BusinessWeek: There has been suggestions that the South African business was not turning a profit due to the high wages you pay workers in that country. On the other hand, in Botswana critics have accused Choppies of maximising profits by minimising costs by paying paltry wages. How do you respond?
Ottapathu: Firstly the South African business is now making money because of operating synergies due to the growth of the business in that country.
We now have about 74 stores in that country. On wages, we have to understand that the cost of living is almost double in South Africa compared to Botswana. You have to look at the Purchasing Power Parity not just the exchange rate. The minimum wage in South Africa is R2,500 and here it’s around P700.
BusinessWeek: Lastly, one of the major shareholders in Choppies, Standard Chartered Private Equity (PE) is divesting from its investments on the continent. Are they retaining their 13% stake in Choppies?
Ottapathu: Yes, they are selling their African assets, but they will continue to manage their investments in Choppies although they have brought in partners. The 13% stake is managed through a Special Purpose Vehicle (SPV) and Stanchart PE has brought in new partners in that arrangement.