Choppies plans to exit SA, Kenya markets… regional expansion drive collapses

Troubled Botswana-based retail group, Choppies, is set to pull out of South Africa and Kenya, two of the region’s largest markets. Its ambitions to become one of the biggest food retailers in sub-Saharan African markets are fading as it plans to exit two key markets in Africa.

The retailer, which has a primary listing on the Botswana Stock Exchange and a secondary listing on the JSE, was established in 1986 with a single store called Wayside Supermarket in Lobatse, Botswana. It now has more than 200 stores in SA, Botswana, Kenya, Tanzania, Zambia, Zimbabwe and Mozambique.

Choppies opened its first store in SA in Zeerust, in the North West province in 2008. It later rolled out over 70 stores to take on established retailers such as Shoprite, Spar and Checkers. It also has three distribution centres and one production plant.

Over the past year, the company has been mired in controversy. It was accused of accounting irregularities, related to how the group accounted for bulk sales and inventory at its stores in SA and Zimbabwe, and store acquisition.

There was also boardroom wrangling that has led to some board resignations. Its shares were also suspended on the Johannesburg and the Botswana stock exchanges.

While company revenue grew substantially from 2013-2017, other metrics showed worrying trends. Earnings before interest and taxes (ebit) deteriorated from 4.97% in 2013 to 1.57%, while return on equity fell from 20.76% to 4.93%. The gross profit margin remained largely static at 20.4%-21.16%.

Signs of trouble emerged when the company delayed the release of its 2017 interim results, which were scheduled to be released on March 21, 2018. They were pushed back after the board instructed management to verify inventories with external auditor, PwC. The results were released on April 26, 2018 after “no material issues were identified”.

Choppies also failed to release results for the year to end-June 2018. It roped in advisory firm EY to conduct a forensic investigation. On September 4, Choppies released the EY forensic report, which highlighted accounting irregularities around bulk sales and inventory at its stores in SA and Zimbabwe, and store acquisitions in SA.

Analysts have raised questions about the pace of Choppies’ growth into new markets. Perhaps the expansion was too much too soon, said independent analyst Syd Vianello.

“They went into a number of markets, one after the other. I think they moved into new markets without properly developing their infrastructure, lines of communication and management,” said Vianello.

The company probably underestimated the difficulties that come with penetrating new markets, he said. “When you go to a new market there is the likelihood that you will lose money before you make money. You need to open enough stores to get critical mass.”

In August the company said it would exit SA after “a strategic review” of its SA business. It expects to receive all bids by October 28, adding that the sale will be concluded “as expeditiously as possible”.

“Exiting the SA market is the appropriate strategic decision for the company. Choppies has commenced a process, which may result in the divestment of Choppies Supermarkets SA in whole or in part,” the company said in a statement.

Choppies said its long-delayed 2018 financial statements are expected to be finalised on December 6. Independent analyst Ryk de Klerk said it would make sense for SA retailers such as Shoprite to buy some of the outlets.

“Choppies found themselves in a low operating margin space and is concentrated in North West province, which is highly dependent on the volatile mining industry. The concentration risk is high, whereas Shoprite is highly diversified,” De Klerk said.

The rand’s volatility against the pula means that the losses made in SA are even worse in terms of pula.

“It also seems that with the apparent accounting scandals Choppies’ total financial position may be worse than that reflected in previous financial statements — that would trigger asset sales to improve liquidity,” De Klerk said.

Operating margins of food retailers are under immense pressure and it is doubtful if Choppies stands a chance to survive in SA, he said. At this stage, the competition between retailers for consumers’ budgets is fierce.

“New entrants into the bricks and mortar stores will have to have deep pockets to survive. The momentum of online sales is gathering incredible momentum and that is an area that could entice new entrants,” De Klerk said.

SA is not the only market that Choppies is looking to leave. The company recently announced plans to withdraw from Kenya. This came four years after acquiring Ukwala Supermarkets in east Africa’s largest economy. Choppies had identified Kenya as a key market for the company in east Africa.

“The current retail market in Kenya is moving towards consolidation. This should benefit us in growing our footprint more rapidly than originally anticipated,” Ottapathu said in October 2017.

Vianello said Choppies’ foray into SA and Kenyan markets was the right move as the two economies are well developed and presented attractive growth prospects. “You cannot fault them for moving into SA, a market dominated by four players. I can say the same about Kenya. These are big and well developed markets,” he said.

Choppies’ entry into SA was controlled as the company concentrated in the Rustenburg, North West area, which is considered a growth area for retail, Vianello said. “They were not all over the place (in SA).” — Business Day