[Podcast] Reaching critical mass: Choppies CEO on becoming a pan-African supermarket

Listen to our interview with Choppies’ CEO, Ramachandran Ottapathu, on reaching critical mass in African markets and taking on Kenya’s local players.

Kate Douglas: While South African grocers such as Shoprite and Pick n Pay have been particularly aggressive in their expansion across sub-Saharan Africa, other markets are producing their own pan-African players. One of these is Choppies, Botswana’s leading supermarket chain.

Today the retailer has 189 stores in five African markets and this is projected to grow to over 200 in seven markets before the end of the year, as it expands into Tanzania and Mozambique.

However, as Choppies’ annual results show, expanding to new markets does not come cheap and has resulted in a nearly 50% fall in its overall profit for the year.

Here to talk about the company’s African expansion plans and strategy is CEO Mr Ramachandran Ottapathu. Mr Ottapathu – welcome.

Ramachandran Ottapathu: Thank you and thanks a lot for inviting me for this interview – I am really grateful for that.

Yes, we are a sub-Saharan African mass grocery retailer. We are expanding into Africa, and this particular financial year we entered into two new markets and we did an acquisition into another region in South Africa. So all three [of these] came in simultaneously, at cost to the bottom line of the company.

Kate Douglas: Let’s start with one of your key markets. So you were talking about the South African acquisition of the Jwayelani chain of 21 stores, which is part of the reason why Choppies has now almost doubled its presence in the market. However, slow economic growth and higher inflation rates have placed pressure on consumers over the period, and have affected Choppies’ gross profit margin. Do you see this improving much over the next financial year?

Ramachandran Ottapathu: Yes, for sure. But we have put in significant infrastructure into South Africa that actually needs to be scaled up. So we are coming closer on the scale to break-even and for profitability. And I think we are not that far away from breaking even and profitability.

Kate Douglas: Choppies Zimbabwe has also seen strong expansion over the past year – growing from 20 to 30 stores. However, the country is struggling with cash supply shortages and has recently introduced import restrictions. How is this affecting business and what strategies are being, or will be, deployed to safeguard against these challenging conditions?

Ramachandran Ottapathu: Import restrictions have reduced the inflow of goods into the country to some extent – that is a political decision I am not in a position to comment on that. But [we plan to increase imports] of rand-based goods in Zimbabwe [from] South Africa, and once that system gets streamlined it will improve our stock availability on the shelf. At the moment there are challenges on the ground. Politically, as well, the country is not going through a normal situation, with extreme issues on the ground. But our trade for the past couple of months has been reasonably decent… Although it is a fact that the country is going through difficult times – economically and politically as well.

We do not yet know the impact of the bond notes, and I’m not in a position to comment on that. But the import restrictions have reduced the availability of the stock on the shelf significantly.

Kate Douglas: And are there any strategies being implemented that could maybe overcome these challenges?

Ramachandran Ottapathu: As company policy we have always supported the local industries. I have always been in support of local industries and local businesses. So that one factor has really helped Choppies because we never try to bring in stock from outside if something is available locally. Only if you can’t get that particular product locally do we then look outside. That strategy has helped us to sustain our business, even in these difficult times. And we will continue to do that as well. Plus the dollar is the one that is in shortage in Zimbabwe. So we are aligning ourselves to import more rand-based products so that the forex requirements are much lighter.

Kate Douglas: Choppies has also entered the Kenyan and Zambian markets, currently with nine and six stores respectively. But these are not yet profitable and you have said they are likely to remain loss-making in the 2017 financial year. What sorts of investments are necessary in these markets and how many stores are required to reach critical mass?

Ramachandran Ottapathu: In Zambia we are expecting it to be reaching that critical mass at 12 stores. We are trying to push [opening these stores] for this financial year. It may happen, but if it doesn’t then it will in the next financial year, certainly.

Kenya we are looking at 16 to 18 stores and that will only be in the next financial year.

Kate Douglas: And the Kenyan market, in particular, has strong home-grown competition, like Nakumatt and Uchumi. Some might even argue this is a key reason why Africa’s largest retailer, Shoprite, has not ventured into the market. How much potential do you see Kenya having for Choppies’ growth?

Ramachandran Ottapathu: It is just simple mathematics. So the population is 45 million people. The total number of supermarkets there is less than 180. So you can see what potential there is in Kenya.

And we just opened our first store in Tanzania also last week.

Kate Douglas: So with this store being opened in Tanzania and plans to also open in Mozambique before the end of 2016, what potential do you see in these markets and which cities will be the key focus for growth?

Ramachandran Ottapathu: We are currently looking at opening more stores in Nairobi in Kenya. In Zambia we are opening another 10 stores in the next year. In Tanzania, it is only four stores because the sites are…

Kate Douglas: Sorry, can you repeat that again? You said in Tanzania you will open only four stores?

Ramachandran Ottapathu: Yes, because the availability of the sites are fairly slow.

Kate Douglas: Looking ahead, are there any other potential markets on the radar for expansion?

Ramachandran Ottapathu: It is only Namibia we have left out in the whole region. So we have covered all the countries. Once that comes to nine… We have signed a few leases but that will mature only next year or so.

Kate Douglas: And your in-house brands? What potential do these brands have in helping Choppies grow in these African markets?

Ramachandran Ottapathu: Currently, in Botswana around 20% of the revenue is from house brands. My target is to get it to 25-26%, on a mature situation. I think in South Africa we are around 5% of revenue and we need to increase it over the year with time. Zimbabwe it is already 9%. Kenya we are only just starting.

Eventually, on a long-term basis, if you ask me, 25-26% revenue coming from the house brands – that would really give us an edge on our gross profit as well.

Kate Douglas: And do you see potential to manufacture locally these in-house brands, for example in Zambia and Zimbabwe?

Ramachandran Ottapathu: Yes, we do. Not necessarily in Zimbabwe, but in other countries – yes.

Kate Douglas: Why not in Zimbabwe?

Ramachandran Ottapathu: Their local manufacturing facilities have not been active. Although they have the infrastructure, manufacturers have not been that active in Zimbabwe.

Kate Douglas: Mr Ottapathu, thank you for your time and we look forward to chatting to you again.