Tuesday, April 23, 2024

Choppies faces cost challenges as it increases footprint locally, SA

Choppies, the BSE-listed supermarket chain, seems to be paying the price for fast expansion across the country and its vigorous entry into the South African market.

A research note on the company by Stockbrokers Botswana, a local brokerage firm, revealed the group’s expansion is ‘evidently taking a toll’ on profits as earnings growth has been relegated to the low single digits.

Choppies has been in an expansion drive since its oversubscribed IPO with number of stores being opened in the country and the erection of a multi-million Pula distribution centre in South Africa’s town of Rustenburg.

“Thus this growth spurt by the group has put a strain on EBIDTA (Earnings Before Interest, Taxes, Depreciation and Amortisation) and net profit margins as costs have begun escalating, particularly due to the new South African operations still on the kick off to full profitability,” said Stockbrokers Botswana in its note.

During the year, South African operations contributed 17 percent to revenue versus Botswana’s 83 percent.

“……the group’s improvement in gross profit margins brings to mind an improvement in pricing power. A 60 percent rise in total operating expenditure to P482million (FY2011: 447million), a higher expansion than the revenue growth rate, has brought down Operating profit margins to 6.79 percent from 7.68 percent achieved in FY2011,” said the note.

Stockbrokers said the extensive growth in operating expense can also be attributed to a 76 percent increase in the group’s employee compensation bill during 2012.

The rise was on the back of an increase in employee numbers to 5,267 (FY2011: 4,455 employees), as well as an adjustment to the groups wage policy which lead to more competitive average compensation (salaries, wages and benefits) per employee, to P34,645.39 from P23,164.90.

During the financial year, four stores were opened in South Africa and additional ones were planned.
In Botswana, the group planned a further 8 stores in Botswana, of which 2 stores have already opened post FY2012; the remaining 6 will be opened before the end of FY2013.

“While this has put pressure on costs and funding needs during FY2012, the investment is expected to pay off when fully operational,” Stockbrokers said in relation to a 10 000m┬▓ distribution centre in Rustenburg, South Africa.

Choppies is also positioning itself in new shopping malls in the city including Railpark and Game City in a bid to ward off competition from peers especially the South African chain stores.

“The group’s expansion is evidently taking a toll on profits as earnings growth has been relegated to the low single digits. The company intends to focus on improving efficiencies from existing operations in FY2013, by implementing an Enterprise Resource Planning (ERP) system. Such developments are welcomed, as they will serve to improve bottom line growth,” said Stockbrokers Botswana.

The retail giant however posted healthy numbers for the year ended 30 June 2012 with the results showing its top-line grew by 36 percent from the prior year.

The group recorded revenues of P3, 3 billion compared to P2, 4 billion mainly driven by implementing an aggressive expansion plan of action over the 12months under review. The group’s balance sheet also grew by 31 percent to P1, 085 million owing to significant rise in stated capital and retained profits.

Choppies controls 30 percent of the fast moving consumer goods market, but faces competition from Sefalana’s Shoppers’ brand and South Africa’s chain stores operating in the country.

“Opposition is amplified by joining South Africa’s highly competitive retail market which includes Africa’s biggest grocer Shoprite as well as Spar. Whilst management is positive about the Company’s business model, future performance will largely depend on the macroeconomic environment in which they operate, in particular inflationary strain on the group’s costs and consumer earnings,” Stockbrokers Botswana said.

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