Batanai Matsika 
OK Zimbabwe Limited (OK) recently issued a trading update for the three months ended June 30, 2021. Management highlighted in the release that while the business environment for the quarter continued to be characterised by Covid-19 induced restrictions, there were less severe compared to the same period in the prior year.
In addition, product supply was stable on the back of improved availability of foreign exchange liquidity accessed through the auction system.
Overall, revenue for the quarter grew by 263 percent in historical terms and by 49 percent in inflation-adjusted terms.
Sales volume grew by 48 percent over the same corresponding period in 2020 attributed to a recovery from more stringent prior year Covid-19 restrictive regulations and the success of the OK Grand Challenge promotion.
In addition, volume performance was aided by a surge in aggregate demand across key product categories. The trading update shows a strong recovery and demonstrates the resilience of consumer-facing companies.
The trading update shows a strong recovery and demonstrates the resilience of consumer-facing companies.
The major risk to growth in the outlook period for the food retailers has been lockdown restrictions. It is a fact that the Covid-19 pandemic has disrupted nearly every routine in day-to-day life.
The extent and duration of mandated lockdowns and business closures have forced people to give up even some of their most deeply ingrained habits —going to a shopping mall for coffee or enjoying Saturday night at the movies.
In our view, such disruptions in daily experiences present a rare moment. In ordinary times, consumers tend to stick stubbornly to their habits, resulting in very slow adoption (if any) of beneficial innovations that require behaviour change.
The pandemic has caused consumers everywhere to change behaviours — rapidly and in large numbers.
Even though the impetus for that behaviour change may be specific to the pandemic and transient, consumer companies like OK and TM Pick n Pay (Meikles) would do well by finding ways to satisfy customer needs in the post crisis period.
This could include reinforcing positive new beliefs, aligning messages to consumer mindsets and analysing consumer beliefs and behaviours at a granular level.
An emerging trend in the consumer space is influencer marketing. In 2015, McKinsey data showed that social media influenced 26 percent of purchases across all product categories, a percentage that has increased since then.
The consulting firm also estimates that 10-15 percent of consumers in developed markets such as the United States, Europe and Japan follow social-media influencers and make purchases based on an influencer’s recommendation.
In China and Brazil, the percentage of consumers who say that an influencer has driven their purchasing decisions is much higher, at 45 percent to 55 percent.
This trend applies consistently across both large-scale social-media influencers (defined as 100 000 followers or more) and small-scale influencers (less than
100 000 followers).
Celebrities also play a key part in terms of influencing habits and purchasing decisions. In Zimbabwe, real estate companies have partnered with celebrities such as Jah Prayzah (Mukudzeyi Mukombe) in marketing stands and housing developments.
We opine that there is an opportunity for consumer companies to use influencers to win consumers across social channels such as on Instagram and YouTube.
This involves partnering with agencies to identify people who have a natural fit to the brand and resonate authentically with the target consumer base.
A good strategy would be to promote the adoption of online shopping platforms.
In the developed world where IoT (Internet of Things) and Industry 4.0 has taken centre stage, the online grocery shopping concept is gaining momentum.
Global retail giants like Walmart have dominated the sector with well-developed supply chains and buying power which enable them to maintain decent profit margins. However, this concept could take some time to be fully developed in countries such as Zimbabwe.
Overall, we continue to like OK, given that it is a low-cost player that taps into broader mass markets. Its gross margins are lower given the company’s policy of investing in price rather than booking gains at gross margin level.
This means that it is very competitive in terms of pricing. While the deteriorating disposable incomes in the broader Zimbabwe economy is a major risk, food is highly defensive.
Further, increased informal sector activity guarantees steady demand. We also highlight that the retailer operates in three different main formats: OK Stores, Bon Marche and OK Mart, selling groceries, basic clothing and textiles as well as house products.
The different formats allow the company to cover all socio-economic groups of the population.
Based on the trading update, we estimate a FY 2022 EPS of ZWL 407.1 cents and this gives an undemanding Fwd PER of 4.0x at the current trading price.
We rate the stock BUY.
Matsika is head of research at Morgan & Co, and founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com/batanai@piggybankadvisor.com
