Choppies still planning fast expansion

Last month Botswana, the world's biggest diamond producer, cut its 2015 economic growth forecast by almost half to 2,6% as weak global demand for the precious stones resulted in lower export earnings. SA will probably fall into a recession in the third quarter. Zimbabwe's economy has been on the decline for most of the past decade, with no sign of respite.

Choppies plans to open 35 new stores, excluding acquisitions, in its home country, SA and Zimbabwe in financial 2016.

The store roll-out, which comes after the opening of 24 new outlets in these countries in 2015, is in pursuit of its goal to operate 200 stores in sub-Saharan by the end of next year. As of June, Choppies had 129 stores - 73 in Botswana, 36 in SA and 20 in Zimbabwe - and seven distribution centres.

The Choppies customer is usually in the lower to middle income segment and mostly pays in cash. Its stores are mainly located in high traffic areas such as taxi ranks and small town shopping centres.

Image credit: Financial Mail

Rapid growth is not new for Choppies, says Ram Ottapathu, who has been CE since 1999.

"We grew by seven times between 2002 and 2007. Rapid growth is in our DNA," he says.

The group has allocated about 350m Botswana pula (about R460m) for its expansion projects and says it also has access to debt facilities.

It is awaiting approval from Kenyan competition authorities for its bid to acquire the 10-store Ukwala Supermarkets, a well-known brand in East Africa. Once the deal is approved, Choppies will retain the Ukwala brand and follow a co-branding strategy, says Ottapathu. The group hopes to increase the number of Ukwala stores to 45 in the medium to long term.

Zambia and Tanzania are its other target markets, along with Namibia and Mozambique.

In Zambia the company was supposed to have opened stores this year, but intermittent power cuts delayed the building of two stores. Ottapathu says both have been fitted and should open in the next month or so.

Hiccups related to acquiring building rights have delayed the Tanzanian roll-out by a further eight months.

Despite the economic headwinds in Botswana, Choppies increased gross profit in Botswana by 7,9% to 852m pula in the year to June.

The group did, however, feel the pinch in SA and Zimbabwe, which together make up about 36% of group revenue.

Choppies has yet to make a profit in SA since entering the country in 2008. Its stores in North West have borne the brunt of declining household incomes, following the plunge in commodity prices which, among other factors, led to mines in the area scaling back output and cutting jobs.

In Zimbabwe, hyperinflation, wage pressures and political uncertainty saw the retailer's net profit drop 54% in the 2015 financial year.

Despite these economic pressures Ottapathu is confident about the resilience of the food business, because "people need food to survive".

Critics believe its goal of becoming the leading retailer in sub-Saharan Africa is far too ambitious and that it will be dwarfed by rival Shoprite, Africa's largest retailer.

In response, Ottapathu says Shoprite had 10% market share in Botswana in 1999, but that this is now only 8%.

"Over that time period we increased our market share from the single digits to 36% currently. Our figures speak for themselves," he says.

Of the four analysts tracked by Bloomberg who rate the stock, two have a "hold" position while the remaining two rate the company a "sell".

Analysts believe the grocer's p:e of 48 is significantly overvalued compared to that of larger and more liquid competitor Shoprite, which trades at a historical p:e of 20.