In August 2017 we looked at Kazyon’s store expansion plans, when the supermarket chain had 200 stores and was behind its schedule to have launched 300 stores by the end of 2017. In December 2017, the company outlined even more ambitious growth objectives for 2018. Can it hit them?
To recap on Kazyon’s extraordinary growth profile: The company opened its first stores in November 2014. In early 2017, it outlined a plan to have 300 stores by the end of the year. Its long term plans were to have 1,000 stores in 2022. But by November 2017 the company had only opened 250 stores, while its main competitor, Turkish discount BIM, had opened around 260 stores. In December 2017, Ismail Hafez, Kazyon’s Marketing Manager, revealed ambitions for 515 stores by the end of 2018.
Between November 2017 and the end of July 2018, Kazyon has opened 133 stores, bringing its total store network up to 383. This broadly equates to a rate of store openings of 15 (14.8) stores per month, or one store every two days. By contrast, in the 12 months between August 2016 and the end of July 2017, Kazyon opened 56 new stores, a rate of 4.61 stores per month. I.e. the pace of store openings has more than trebled.
Is Kazyon on target?
In order to hit the target of 515 stores by the end of the year, Kazyon will need to open another 132 stores in 2018. It has five months, which means a store opening rate of 26.4 stores per month. I.e. almost double its current rate and nearly one store each day. Impossible? No. Likely? Probably not.
On the current rate of growth, Kazyon will have opened 443 stores by the end of 2018. If we look at the longer term growth trajectory, Kazyon’s plan for 1,000 stores by the end of 2022 looks more achievable. On its current store opening rate of around 15 stores per month, the retailer could have 1,150 supermarkets by end of 2022. Bear in mind that in its native Turkey, BIM has been able to open more than 1,000 stores in 18 months alone.
Perhaps this misses the point though.
BIM in 2018
In our original analysis last year we looked at BIM and Kazyon and concluded BIM had the upper hand. According to the company’s own information, BIM reported having 277 stores in Egypt, having opened 12 stores in Q1 2018 It had outlined plans to open 40 stores in Egypt in 2018, so 12 stores a quarter is on track. We note, however, that from July 2016 to August 2017, BIM was opening stores at a rate of more than 6 per month.
In other words, BIM’s store network in Egypt is in slow growth in 2018, while Kazyon’s has gone through rapid expansion. The size of store networks does not tell us about the profitability or viability of trading. We certainly cannot draw direct conclusions from the difference in pace between the two retailers. In BIM’s case, however, there is a small clue in the Q1 2018 results. The results show that in Morocco, where BIM had 399 stores at the end of Q1 2018, the company is EBITDA positive. There is no accompanying note about EBITDA for BIM in Egypt, so it is safe to assume EBITDA is negative.
So for BIM we can see a planned change of focus away from store expansion and towards operational efficiency and driving organic sales growth. As such, we can see a clear divergence in strategy now between BIM and Kazyon: BIM looking to drive EBITDA into positive territory, Kazyon still in a rapid expansion phase; BIM adopting a more cautious approach to risk, Kazyon seeking market dominance.
This difference is especially interesting when one considers BIM’s twenty year track record of delivering astonishing network growth and ruthless operational efficiency. By contrast, Kazyon has no track record. In that context, Kazyon is adopting a much riskier, cash-burning approach, presumably with the full agreement of its PE backers.
Future outlook
The broader economic indicators are positive.
Egypt’s economy is stable and growing. Real GDP growth in 2018 is expected to be above 5%. Egyptian equities are performing well. The currency is stable. In May 2018, S&P raised Egypt’s credit rating from B- to B.
On the negative side consumer prices are still rising. In June 2018 official statistics showed a substantial rise in the CPI index, from 265.5 the month before to 274.9. This means that the cost of food in Egypt increased 10.13% year on year from June 2017 to June 2018. However, Food inflation in Egypt averaged 16.42% from 2010 to 2018 and actually peaked at 43.61% in April 2017.
In other words, Egyptian consumers are still desperate for food prices to come down, high price sensitive and highly receptive to discounters that can deliver lower prices. What we are seeing is BIM addressing this need by focusing on store operations, store profitability and its ability drive down prices through efficiency, While Kazyon is focusing on bringing the discount format to as many consumers as possible, but doing so at a cost, and with a higher risk profile.
