5 Reasons Shoprite Holdings Could Buy OK Zimbabwe

OK, Zimbabwe (OKZ) has been struggling over the last year, but as I discussed in my previous post, their most recent results could be a sign of improvement, however, it will take another quarter to know for sure.

Whatever the case I think OKZ could be an attractive acquisition target, especially for Shoprite Holdings.

Shoprite Holding is Africa's largest grocery retail business, with 2,938 stores plus 605 franchise outlets. It operates in nine African countries and has over 1,600 employees.

Here are 5 Reasons why Shoprite could buy OK Zimbabwe.

1. Shoprite has already thought of buying OKZ before

The idea of Shoprite buying OKZ is not new. In 2009, Shoprite entered negotiations with OKZ to acquire the business.

Source: Newspaper report

However, a few months after the story broke, Shoprite put the plans on hold, saying that “due to the current socio-economic and political uncertainty in Zimbabwe”, it would not pursue any further investment opportunities in Zimbabwe “in the short to medium term,”.

The Mail& Guardian speculated that Shoprite became nervous because Kingdom Meikles Africa Limited, which owned retailer TM Pick n Pay, had been “specified.”

The specification effectively meant that the government temporarily seized assets belonging to Kingdom Meikles Africa Limited because of an allegation of externalising foreign currency.

Now that it's 15 years later and TM Pick n Pay has managed to continue without significant issues, perhaps Shoprite has a better reference point for understanding the risks of operating in Zimbabwe and how to navigate them.

After all where there is risk there is also reward, which leads me to the next point.

2. It would complete Shoprite’s Southern Africa footprint

When you look at the map of Shoprite’s operating countries, the fact that Zimbabwe is missing sticks out like a sore thumb.

From Shoprite’s 2022 annual report.

In recent years, Shoprite has become increasingly focused on Southern Africa with its exit from Nigeria, Uganda, and Kenya around 2021.

The map above is from the 2022 annual report. There have been some changes, with Shoprite exiting the DRC in 2023, but it still clearly shows the missing piece of the puzzle.

Would it not make sense to add Zimbabwe to the mix despite its challenges?

Another advantage is that Zimbabwe is very central and could serve as a distribution hub, especially with the introduction of the African Continental Free Trade Area (AfCFTA)

3. OK Zimbabwe could contribute meaningfully to Shoprite’s revenue and growth

If OKZ were to be acquired, it could be Shoprites’ largest market outside of South Africa.

At its peak, OK Zimbabwe's revenues were close to $500m per year, which would be about 4% of Shoprite's revenues today.

While 4% seems small, the supermarket business of the other nine countries Shoprite operates in contributes 9.1% of the group's revenue.

Extract from Shoprite’s 2023 annual report

In addition, Zimbabwe’s economy has been depressed for a considerable amount of time, so there is a lot of unrealised potential.

There are many reasons why people have stayed away from Zimbabwe, but as Warren Buffest says, sometimes you need to be “greedy when others are fearful” to make money.

4. OK’s value has dropped significantly and could be bought at an attractive price

OKZ's market cap today is ZiG 641 million, or about $46 million.

For comparison, OKZ’s average market cap in 2014 was $203 million.

Some of the falloff in value is due to the overall economy and the higher perceived risk premium in Zimbabwe, while the rest is due to operational challenges.

Within what can be controlled, I think there is still a lot of value that can be unlocked, especially by Shoprite. For example, Meikles Limited, now mostly made up of TM Pick n Pay, has a market cap of about $140m while having a smaller branch network as OKZ.

This leads to the final point.

5. OKZ could fit into Shoprite seamlessly

OK Zimbabwe’s history can actually be linked back to the OK Franchise business that Shoprite owns. The first OK business was called OK Bazaars, which started in 1927 in South Africa.

Photo of an old OK Bazaars store

In 1942, OK Bazaars entered into the Zimbabwean market, opening the first OK Bazaars in what is now Harare today.

The business expanded over the years and was bought by Delta Corporation in 1997. In 2001, Delta Corporation demerged the business into the listed company we know today as OK Zimbabwe.

In South Africa, OK Bazaars was bought by South African Breweries in 1973 and then famously sold to Shoprite in 1997 for R1 after the business became financially distressed.

So, in some ways, the OK Franchise Business owned by Shoprite is the bigger brother to OK Zimbabwe and if logos are surnames; its easy to see that the two businesses are closely related.

It also seems that the “brothers are keeping in touch.” In OKZ’s Q3 update it mentioned "strategic partnerships with Shoprite Group of South Africa” as one of their key focus areas.

From an earlier post on Money & Moves.

So it’s clear there is already some sort of working relationship between the companies. This indicates that it may not be as challenging to integrate OKZ into Shoprite’s business.

OKZ could also use some help from its “big brother”.

While Shoprite has been outperforming its peers, OKZ has had a tough year, with sales volumes down 29% compared to its closet competitor TM Pick n Pay, which had a 5% drop in volumes.

As part of Shoprite, even if not an outright acquisition, OKZ would be well-placed to tackle the challenges it is facing and grow into the future.

Final Thoughts

In reality, other factors could ultimately rule out Shoprite from making a deal for OK Zimbabwe.

In the last few years, Shoprite has been exiting several African markets, and one of the key focus areas of the Finance and Investment Committee in FY2023 was “Sales of businesses in Africa.”

Shoprite has stated that operating in the Rest of Africa has had its challenges, including “logistical and operational challenges, currency volatility, lack of customer affordability, rampant inflation and an inability to repatriate cash.”

Unfortunately, most of those factors apply to Zimbabwe as well.

Personally, I think these challenges can be overcome. After all, despite these factors, TM Pick n Pay in Zimbabwe has outperformed Pick n Pay in South Africa, although the bar was quite low.

Let me know what you think. If you have specific comments or questions, please feel free to contact me at tinashe.mukogo@insead.edu.

PS I am working with publicly available information, so my analysis could be missing something or just wrong.