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SBB report card on Retail Sector

Publishing Date : 13 February, 2018

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Retail giants Choppies and Sefalana are both on a regional expansion drive, at opposite extremes however, with the former carrying out a rapid growth strategy and the latter adopting a more cautious approach.

With the Botswana retail market at a saturated stage, regional growth is ever more important to delivering growth in returns to shareholders over the medium to long term. Choppies now operates in 8 countries across Sub Saharan Africa with a target of 252 stores (2017: 212) by the end of their 2017/18 financial year.

We anticipate to continue seeing strong growth in revenues on the back of this expansion. However, we believe profitability will remain constrained in the near term as the retailer absorbs costs from the rapid expansion. The group operates a robust business model which should deliver bottom line growth from the expansion once operations are bedded down and efficient, over a medium term horizon.

Sefalana is maintaining its status-quo with regards to expansion with a total of 3 new store additions expected by the end of their 2017/18 financial year. Locally, the group’s margins are under immense pressure on the backdrop of a competitive, saturated market.

We also believe this is in part due to the group’s largely cash and carry business model, which yields much lower margins in comparison to retail. Entry into Lesotho has contributed well to revenue; however margins are even thinner in this market. One of the new stores will be opened in this country, currently slated for February 2018.

Given the low margin environment, we do not foresee Lesotho contributing significantly to the bottom line. Metro Namibia’s consistent performance has been attributed to a consumer spending pattern shift from retail to wholesale according to management. Given this shift, and recent refurbishment and expansion of some of the Namibian stores, this segment should continue to be a solid performer. The group has concluded its long awaited transaction in the South African market via a R250 million investment in an FMCG consortium.

According to management, the investment provides Sefalana with a fixed annual return of R50 million for 5 years with the option to redeem the principal or convert the investment to a 30% equity stake in the consortium at the end of the 5 year period. Proceeds from this investment anchored the group in their latest results and should continue to offset pressures from the strained local operations and volatility of some of the non-core segments.



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