Did external factors sorely affect OK’s performance?

By Blessing Nyatanga | Oct. 13, 2023

One of the major aspects highlighted by OK Zimbabwe is exchange rate fluctuations that existed in the first and second quarter of 2023 where prices rose unabated daily.

IN a recent development, OK Zimbabwe has noted with grave concern that it is reeling under a lengthy list of challenges and these entail incessant power cuts, unabated exchange rate fluctuations, competition from informal traders as well as erosion of disposable incomes for consumers among others.

The unprecedented revelation has made the headlines in the business industry as many are concerned about OK’s continued existence. The CEO of OK Zimbabwe hinted in his address that the shop was spending large amounts of money to keep its doors open, an innuendo that is alarming as far as its going concern is concerned.

This article will attempt to assess the issues raised by the giant retailer as well as other internal factors that could be attributed to the financial stress.

Untamed hyperinflation

One of the major aspects highlighted by OK Zimbabwe is exchange rate fluctuations that existed in the first and second quarter of 2023 where prices rose unabated daily.

The period was quite uncertain for business operations because it became complex to set prices and adjust them daily for inflation. The exchange rate distortions were enhanced by the thriving of the parallel market, which according to popular belief controls the exchange rates locally.

The black market is also believed to be the major source of foreign currency where most business access their foreign currency. In this vein, prices were determined by the parallel rate albeit OK was bound by the legal mandate to sell at the interbank rate, which was noticeably failing to converge with the parallel rate market.

This is one of the factors that OK insinuates affected them because they had to sell their products for a lesser price in the local currency and were failing to compensate their replacement cost.

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Incessant power cuts

OK Zimbabwe also noted explicitly that the rampant electricity cuts that existed in the second quarter of 2023 were a burden on their cost of production as they had to employ other sources of power such as generators.

Logically it stands to reason that the purchase of fuel for generators to run the length of a business day was an unforeseen cost, which added to their expenditure on top of the electricity bill they still had to pay. The large retailer ascertained that fuel for backup power was a “major” cost increase and that it significantly escalated their cost of doing business.

Competition

When the retailer presented its financial results in September, it pointed that it suffered an 8% drop in sales volume in the year to March and growing competition from informal traders was cited as a fact which attributed to this financial cosh.

The argument is that informal traders have a comparative advantage on large retailers on the basis of regulations, overheard costs as well as scrutiny.

OK Zimbabwe alluded that some informal retailers have taken their business on the door step of several supermarket outlets. The informal traders then sell their products at lower prices as they incur lower overheads without any rentals to worry about. This move would naturally have some customers opting to buy products outside and not from the shop.

Low disposable income

One of the conspicuous concerns outlined by OK is the erosion of disposable income, which has ultimately suppressed consumer demand for products.

The unabated increase in prices of products especially in the first and second quarter of 2023 had a corrosive effect on most consumers’ ability to continue making purchases.

This aspect was exacerbated by the lower incomes as salaries were often not proportionally adjusted in line with unabated price increases. The two relative factors attributed to a decline in sales for OK Zimbabwe.

Did OK Zimbabwe make any internal mistakes or it was sorely the external environment?

At this juncture,it is imperative to assess OK Zimbabwe’s financial operations and ascertain the extent to which they may have contributed to financial distress.

Capital allocation

According to OK’s financial results, theirinterim dividend was US$0,13 and the final dividend was 6,5 times smaller than the final dividend at US$0,02 per share, an unusual occurrence. Interim dividends are usually smaller than final dividends.

The major challenge with paying out high dividends is that you are giving away your largest comparative advantage against informal traders and retailers and that is capital.

OK mentioned that their income constitutes of 20%US$ and to wholly pay their dividends in US$ may not have been prudent.

Lagging on creditors payments

OK Zimbabwe had payment issues with creditors where they were lagging and it would eventually be an inconvenience on the creditors given precarious exchange rates. This led to most creditors tightening payment terms and resorting to shorter days as far as payments are concerned.This is naturally is a stretch on the working capital of the business case in point OK.

Opinion

It is imperative to note that OK Zimbabwe has been marred by external factors as expressed in their disclosure. The exchange rate differentials, power cuts as well as growing competition are material factors that increased their cost of doing business.

However, the large retailer has made some questionable financial decisions, which have eroded their capital base and in some instances increased their aggregate expenditure.