'Innscor suffering from old conglomerate syndrome'

INNSCOR'S first quarter performance is not only signalling the slowdown of the economy, but is also pointing to a business which has reached maturity and perhaps suffering from an old conglomerate syndrome.

Innscor's turnover in the first quarter grew 5 percent and group chief executive Mr John Koumides told the annual general meeting on Friday that the growth in turnover was almost similar to the one experienced by most of the companies such as OK and Delta.

Mr Koumides said the growth rate was a common percentage "which shows what is happening in the country."

He added: "The challenges are there and what is good to see is that the Government is beginning to realise that these challenges exist and reality checks are coming into play."

Profitability in the quarter was down 19 percent weighed down mostly by the bakeries and SPAR Zimbabwe. Turnover at the bakeries was down 8 percent while Spar Zimbabwe's top line was also down 2 percent.

Fast foods and bakeries have plateaued and have already reached their peak performance. Given the amount of capital that it has spent in its various business units since dollarisation it is really a period of gloom for the group.

Whilst there was growth in revenues; this was as a result of capital expenditure aimed at growing capacity. This means there was really no growth in the group if you were to analyse its Like-For-Like sales. The group might now have run out of ideas and is basically following the old bygone way of doing things, non-strategic overexpanding done without proper planning, growing for the sake  of growing.

Hence the reason you see the sprouting of an outlet on almost every corner in downtown Harare, a mis- allocation of capital and potentially creating future white elephants.

Mr Koumides admitted there was some cannibalisation taking place through the proliferation of sites particularly in the CBD, but he noted it was necessary to close the doors on competition.

At the fast foods and bakeries division how much of the current installed capacity of 450 000 loaves per day is actually being sold, and is increasing that capacity by another 160 000 in 2014 warranted, given the scarcity of capital in Zimbabwe?

Regional fast foods recorded an increase of 5 percent in turnover and during the quarter they opened four new counters in Kenya while 17 outlets were in various stages of completion by end of September and all of these will open by the second quarter.

Kenya also has growth opportunities, but had been slightly affected by the Westgate terror incident as the group had a site. Mr Koumides said it was difficult to find sites in the area.

Ghana was doing "okay" while the Nigeria franchising would be discontinued with the group considering going into the country through a partnership.

Mr Koumides stated that star performer for the group in the quarter was TV Sales & Home, with a 30 percent increase in turnover while the "profits are much more than that".

Spar Zambia was performing well with a growth of 11 percent, but Zimbabwe was a problem as there were problems with the franchise stores.

"If the franchise stores are not performing to expectations, the distribution side gets affected," Mr Koumides said. Turnover was 2-3 percent down. The company has to address its Spar division which seems to be the black sheep in the group. Since 2009 the unit is not performing to expectations and is struggling to make a decent bottom-line. Maybe the model does not really work in a Zimbabwean setting.

Overall, however, Innscor is a great company and one of Zimbabwe's iconic brands. They have been creating capacity and can easily grow should consumer fundamentals improve. Going forward, Innscor should look at more spin-offs to unlock shareholder value and substantial investments should be made using its cash-flows, in a way that creates value for shareholders, by acquiring business that blend well with its businesses and strategically fit into its structure.