Fighting for survival, Choppies prepares to exit South Africa

Botswana-based Choppies, which at its peak operated more than 240 supermarkets in eight countries across Southern and Eastern Africa, has agreed the sale of its South African operations to Kind Investments Proprietary Limited for ZAR1 (USD0.07), including the assumption of all of the subsidiary’s debts. The deal is expected to close by February 2020.
As part of this deal, Kind Investments, the ownership of which has yet to be ascertained, is also obliged to make an immediate, interest-free loan of ZAR100 million (USD6.9 million) to Choppies Supermarkets SA. This will be used as working capital. Choppies opened its first South African store in 2008 and had around 90 outlets at its peak, in addition to three distribution centres and a manufacturing facility. Most of these stores are located in North West Province, a mining region that borders Botswana.
According to Choppies, its South African subsidiary has been trading at a “substantial loss for the last two years.” It added that a “lack of cash flow resulted in trade creditor suppliers not being paid … and hence refusing to supply stock, causing stores in South Africa to become understocked and lose market share.”
As a result, Choppies Supermarkets SA was no longer able to service its debts, putting it in danger of being wound up. Such a scenario would have endangered the creditworthiness of its parent company, forcing Choppies to take action.
In its last financial report (for the second half of its 2017 financial year), Choppies claimed that it had achieved profitability in South Africa. However, this proved to be illusory: In September 2018, management acknowledged accounting irregularities, which lead to the suspension of trading in its shares. This sparked a struggle for the control of the retailer that was eventually won by CEO Ram Ottapathu. This fight was complicted by the close ties that Choppies has long maintained with politicans and government officials in Botswana – something its domestic rivals have frequently decried.
Choppies is also in the process of exiting the Kenyan market, which it entered in 2015 with the acquisition of a number of Ukwala supermarkets, growing to almost 20 stores by late 2018. It has also exited Tanzania, where it had just two stores. When its exit from these three markets is complete, Choppies’ store count will have halved, leaving it with less than 130 outlets concentrated in three markets – Zambia, Zimbabwe, and its native Botswana.
The Sagaci Research View: Choppies’ ambition to become a major player with the economies of scale required to challenge the likes of Shoprite and Spar in sub-Saharan grocery retail has almost been its undoing. Like Kenya-based Nakumatt, an over-aggressive expansion plan, the overweening confidence of senior management, and weak internal controls combined to form a toxic brew for the Botswanan chain.
Choppies recent missed yet another self-imposed deadline (December 6th) for the publication of annual results for its 2018 and 2019 fiscal years, undermining what little confidence anyone can have left in it.
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