We have extracted the Chief Executive Officer’s Statement from the 2019 abridged report for Simbisa Brands Limited (SIM.zw), listed on the Zimbabwe Stock Exchange:
In the financial year ended 30 June 2019, economic challenges continued in our largest market, Zimbabwe. The environment was marked by hyper-inflation, shortage of foreign currency, acute power outages, price distortions, poor infrastructure service delivery and general economic uncertainty. Notwithstanding the announced fiscal and monetary interventions by the Government of Zimbabwe, the environment remains difficult. Management, with assistance from the Board, have proactively sought to manage these challenges, making bold decisions along the way. Despite these challenges, the Group has remained resilient and continues to pursue a growth strategy in all its markets.
GROUP PERFORMANCE OVERVIEW
Deteriorating economic conditions in Zimbabwe have resulted in erosion of consumer earnings which in turn have negatively impacted our sales volumes and seen a general trend of customer downtrading. High and escalating inflation and foreign currency exchange rates are putting downward pressure on Gross Profit and Operating Margins. The Group’s response has been to establish an optimal pricing strategy with controlled price adjustments necessary to maintain our margins whilst also keeping our prices competitive and affordable to an increasingly price-sensitive market. Disciplined cost of sales management and implementing a strict cost-control strategy has also been key to maintaining margins in the financial year under review and management have performed commendably in this regard. Customer counts dropped 5% year-on-year as a result of the aforementioned pressure on consumers which has dampened consumer spend across the entire Zimbabwe consumer sector. Inflationary-driven price increases saw Average Spend increase 89% compared to prior year. Total revenue for the period increased 79% to ZWL 255.1m (ZWL 142.3m in FY18). Same store revenue increased 72% versus the prior year.
Efforts to defend the Zimbabwe operation’s margins paid off and the GP Margin improved versus the prior comparable period as did Operating Profit Margins, which increased from 16.6% in FY2018 to 20.8% in FY2019. The Group continued to grow market share in Zimbabwe with the opening of 17 new counters between 30 June 2018 and 30 June 2019 to close the year with 209 counters. This included the launch of the new Nando’s ‘Casa’ casual dining format which has been met with enthusiasm from our customers and is in line with our strategy to grow our casual dining, upper LSM market segment. Capex of ZWL 18.4m was outlaid during the period under review for expansion and maintenance of our existing counters to a best-in-class standard.
Customer counts in the regional business grew 6% from prior year and average spend in USD-terms remained firm, despite currency devaluation experienced in Ghana and Zambia where the respective local currencies dropped 13% and 29% against the US Dollar over the financial year under review. Revenue generated by our regional operations increased 12% year-on-year in USD-terms and 118% from prior year in Zimbabwe Dollar terms to $ 135.9 m ($ 62.4 m in FY2018). Regional operating margins improved from 7.3% in FY2018 to 8.1% in FY2019. Growth in the regional business has been led by Kenya where 18 new counters were opened between 30 June 2018 and 30 June 2019 including the new Grill Shack brand which was opened in January 2019 and is performing above expectations. The focus in our other regional markets has been to streamline the business, defend our market position and ensure existing operations generate positive returns on investment.
Customer counts grew 4% versus prior year on a same store basis and 8% versus prior year when including the new stores opened in the period under review, with the full financial impact projected to come through from the first half of FY2020. Kenya closed the year with 141 counters in operation. Kenya has been identified as a key growth market in our regional business due to a growing middle-class population, high and improving consumer income levels and stability in the trading environment. The Group will achieve organic growth through expansion of our existing brand footprint and remains vigilant to growth opportunities arising through new business acquisitions and partnerships.
Following the restructure in which we acquired the minority interest to own 100% of the Zambian business, there has been a marked improvement in the business’ performance over the financial period under review with top line growth registered in local currency terms despite the closure of 10 counters in the second half of FY2018. Gross Profit and Operating Margins also improved in FY2019 compared to the prior financial year. However, the market was negatively impacted by unfavourable exchange rate movements over the financial year which dampened performance in US Dollar terms. Downside risk to the Zambian Kwacha remains high in the short to medium term. Management have taken proactive steps to mitigate the risk through a carefully managed pricing strategy, delivering value meals to customers, sourcing inputs locally wherever possible and negotiating costs in local currency terms. The period closed with 25 counters operating in this market.
MAURITIUS, GHANA, NAMIBIA AND DRC
A focus on enhancing operating efficiencies and ensuring existing operations generate positive returns on investment has started to bear fruit in our regional business. All of our regional operations registered growth in operating profit and firming operating margins during the period under review with the exception of Mauritius where increased competition and stock cost control issues have brought margins under pressure. The latter is being addressed through an aggressive in-country marketing campaign, product development and front-of-house revamps to revitalize the brand and counter competition and the migration of the warehouse onto a new stock control platform in order to improve margin controls.
Changes to the VAT Policy in Ghana enacted in August 2018 have impacted the business through an effective 5% increase in cost prices and import duties as well as putting pressure on consumer spend. The market also experienced exchange rate weakness during the period under review. As such, the Ghana operations’ revenue in US Dollar terms fell 7% compared to prior year. However, loss in revenue has been countered by cost containment measures which resulted in an increase in operating profit in US Dollar terms. We continue to operate our business in the DRC under a master franchise arrangement; the business is performing well, and operations have been expanded into Kinshasa through the opening of 4 new counters in the first half of FY2019. We have a good relationship with our franchisee and former partner in this market and remain confident of the DRC business’ future prospects.
As previously communicated to stakeholders, our key strategic objectives are to continue to grow the core QSR business in existing and new African markets, to develop and acquire other brands in the QSR and casual dining segment and to enhance our service offering through technology development. Following the successful launch of our new Dial-a-Delivery mobile application in Zimbabwe and Kenya in FY2019, our focus in FY2020 will be to further develop and grow our delivery business in order to tap into a previously under-serviced online market and improve the convenience of our customers’ ordering experience. This will be achieved through the roll out of our mobile application through the remainder of our markets and exploring opportunities to include third party delivery services. We have adopted a proactive strategy to manage the specific economic challenges pertaining to the Zimbabwe QSR market. This involves putting in place robust measures to hedge against inflation and currency volatility and a pricing strategy to optimize revenue while maintaining margins. We will continue to grow the market through a controlled roll out of only ‘grade A’ sites that will optimize the allocation of limited foreign capital resources and maximise shareholder returns.
Challenges in the trading environment in Zimbabwe are expected to persist. Although the establishment of the interbank foreign exchange market in February 2019 has restored some stability to the monetary regime, foreign currency supply remains restrained resulting in delays in external payments, currency speculation and inflationary pricing at a premium over the official inter-bank rate. Constrained consumer spending habits and resultant downtrading activity will remain a challenge for the business in FY2020. Despite the anticipated headwinds, we believe our people and products will be able to continuously deliver value to all of our stakeholders. Our brand portfolio spans a wide spectrum of consumer income levels and consistently delivers to our customers convenient, affordable and quality meals. Our people have the drive, experience and expertise needed to execute our strategy and successfully navigate the
business through a challenging operating environment.
The biggest risk to our regional markets emanates from currency risk where volatility in exchange rates against the USD impacts customer spending patterns and operating margins. Upcoming elections in Mauritius are expected to be peaceful, with no major disruption to business activities expected over the election period. We are confident that the region’s contribution to Group performance will continue to grow and unlock value for our shareholders.
Chief Executive Officer