OK should improve cost management

OK should improve cost management
Published: 14 June 2014
OK Zimbabwe last week reported March results which showed declining profitability and flat revenue growth.

Chief executive Mr Willard Zireva recognised the factors affecting the operating environment.
These include the poor agricultural season, high and increased unemployment.

"The tighter liquidity crunch also limited demand. But for retailers, it was the deflationary cycle which affected revenue growth."

Mr Zireva told analysts last week that deflation for retailers crept in July although official negative inflation was -0,91 percent by March 2014.

"The impact is significant going forward. We have already spent nine months in the negative and this has ramifications in terms of what it does to the topline."

There was a 0,8 percent increase in revenue to $483,7 million. Gross profit margins declined slightly to 17 percent (2013:17,2 percent) due to a higher propensity to consumer low margin basic items by the local populace.

Overheads were up 6,3 percent due to an increase in advertising and promotional expenses. More staff was engaged to provide adequate services in improved facilities, higher cost of utilities and increased cost of security.

Generally, OK's results were a reflection of the prevailing environment. However, they did not do well, based on management strategy.

In an environment where SPAR and TM are struggling, they should have actually shown some growth in all lines.

They missed the standard performance of retailers of posting a bottomline, which is four percent of turnover. They were around two percent.

The economy is static or rather spiralling downwards and yet the group is growing its number of stores by 9 percent across its franchises and employing more people, all a good thing but not under the current circumstances.

The end result of all that capex investment and increase in cost is just a 0,9 percent revenue growth.

In the period, the number of stores had increased to 59. This included three new OK stores even thought one had closed in Harare, the new Bon Marche in Bulawayo bringing the total count to eight and i-tech at Eastlea.

Mr Zireva said the group had carried on with its capacity enhancement target of opening five-six stores per year, taking advantage of opportunities which came by. Net sales per square metre dropped to $5 865 from $6 067.

The group will enter into new locations going forward while they will also follow through on regional expansion initiatives.

Mr Zireva said the group had identified two sites.

OK Zimbabwe has a negative revenue growth rate if we analyse the group's Like-For-Like Sales numbers (Like-for-Like Sales is a method of valuation that attempts to exclude any effects of expansion, acquisition or any other event that artificially enlarges a company's sale).

Like-For-Like numbers in this instance will show that there is really not much growth in the business.

Looking from the top down, the company's income statement, the decline in the company's profits (EBIT) is as a result of a combination of declining revenue and increasing costs – with higher costs mainly resulting from higher Cost Of Doing Business (CODB) i.e shrinkage (which has remained at +$2 million), inefficient supply chain, and margins.

Instead these critical areas should be the main focus for the group's management.

Return On Capital Employed (ROCE), a useful measure of efficient allocation of capital is down to 17 percent from 25 percent in the prior year despite growing its assets by 0,6 percent yet the ROCE has taken a dip from 25 percent in 2013 to 17 percent in 2014, giving a conclusion that all that capex spend went down the drain.

All what management had to do was to focus on cost containment, and supply chain solutions.

In the end revenue might have taken a hit but the result would have been increased profitability from prior year, but at least all the ratios would have been a little better.

So has OK reached maturity? A good retailer should go beyond just selling groceries. And it's good that OK Zimbabwe has realised now that they need to have control of the service departments (fruit & veg, deli, bakery) starting with the taking over of the bakery stores from Innscor.

These departments have very good GPs.

OK overall are not maximising their retail space and are actually more profitable because they carry a very low staff cost which may also be the reason why shrinkage tends to be high.

The key ingredient missing from management's strategy is focusing on reviving its sales, utilising the existing floor space.

On another note, retailers should generally disclose the contribution of turnover and GP percentage by store section (i.e. floor, hot deli, cold deli, general merchandise, appliances & services) because certain elements of the business are weighing down the overall performance.
- The Herald
Tags: OK,


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