A POTENTIAL shift in fortunes may be on the horizon for OK Zimbabwe, as policy changes and a government crackdown on illegal imports could help drive sales back to the formal retail sector, according to securities firm Morgan&Co.
Zimbabwe’s formal sector players, particularly retailers, have been lamenting unfair competition from informal sector operators, who sell smuggled goods and evade taxes.
To level the playing field and safeguard local industries, the government has launched a nationwide crackdown on smuggled goods and counterfeit products.
Small businesses are now mandated to register with the Zimbabwe Revenue Authority (Zimra) and maintain records of all transactions. They are also required to use point-of-sale machines and comply with tax regulations.
Non-compliant businesses risk temporary closure by Zimra until they register and pay applicable taxes.
“Tight monetary policies, constrained disposable incomes, taxes and suppliers’ growing preference for the near-cash informal market continue to add pressure to OK Zimbabwe’s bottom line in the absence of exchange gains,” Morgan&Co said in its analysis of OK Zimbabwe’s financial results for the half-year ended September 30, 2024.
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“However, recent policy shifts in favour of formal retailers and a crackdown on illegal imports could drive sales back to the formal sector, albeit marginally.
“This, coupled with a relatively narrow exchange rate gap could potentially see increased traffic in formal retail outlets.”
Further, the relatively stable currency introduced early last year will come as a reprieve as it softens the group’s persistent operating costs, the securities firm noted.
“We also note the continuous refurbishments and organic growth as a way of maintaining sales volumes and are cognisant of the business growing USD sales as a proportion of total revenues, which stands as a key trigger to OK Zimbabwe’s defence against market share loss from informal retailers,” it said.
“That said, the business’ procurement challenges could push suppliers and, in turn, sales to competitors in the long-term.”
OK Zimbabwe reported a growth in total revenue anchored on a 28% increase in sales volumes.
Promotional activity, particularly the OK Grand Challenge Promotion, was the key driver behind sales volumes growth, which included the group’s OK Mart stores.
Resultantly, the gross margin improved by 2,81 basis points to 19,64%.
Morgan&Co noted that significant exchange gains attributable to the devaluation of the Zimbabwe Gold outweighed a surge in operating costs, driven by a combination of expensive energy alternatives and increased tariffs, resulting in a positive operating margin.
The group recorded an overall profit position with a profit after tax margin of 2%.
Total assets growth of 4% to US$188 million was mainly driven by an increase in both inventories and trade and other receivables.
Net cash balances improved because of working capital changes and these were complemented by increased borrowings.
According to Morgan&Co, the formal retail sector remains uncompetitive because of imposed pricing inefficiencies that makes formal retail products relatively expensive compared to informal retailers.
Further, it noted that tight monetary policies, constrained disposable incomes, taxes and suppliers’ growing preference for the near-cash informal market have all added to the industry’s challenges.