Shoprite plays role of knight in armour to struggling OKMarcia Klein looks at the sale of the one-time supermarket giant for a mere R1
THE story goes that Sam Cohen, the man who co-founded the OK Bazaars in 1927, wore a handkerchief in his top pocket with the embroidered initial letters of his home-grown philosophy - you can't do business sitting on your arse.
And for the OK, which seems to have ignored this philosophy in the past 15 years or so, the results have been nothing short of tragic. The R6.4-billion company, the owner of one of SA's biggest brand names, is a financial and operational mess and was sold to competitor Shoprite last week for a mere R1 with a guarantee of a minimum net asset value of R540-million - not to mention a huge assessed tax loss. Talk about a bargain basement sale!
Whitey Basson, the managing director of Shoprite, is a man carved in the Cohen mould. Hands on can hardly describe him. In his first week at the helm of the OK, Basson was clearly in charge at its head office in Johannesburg and appears to have already done more to initiate change than OK's previous owner, SA Breweries, has done in the past decade.
To Basson, the challenges he faces at the OK are old hat. He has in the past few years, bought and turned around another two retail chains - Grand Bazaars and Checkers.
Last Saturday Basson and his Shoprite management team took operational control of OK, which has 139 OK stores, 18 Hyperamas and 21 House & Homes, and immediately set to work to stem the losses. Basson has estimated the company is heading for a loss of R250-million in the year to March 1998.
In the year to this March, OK's losses had deepened to R74-million from R1-million in the previous year. And in the first quarter since year-end, losses of almost R40-million had already been incurred. SAB said that the OK had, over years, incurred significant losses on the back of difficult economic and trading conditions and "despite ongoing operational and financial steps to improve matters".
It said the disposal relieved it of a loss-making investment "that has required substantial cash resources and management commitment over a number of years".
Between 1994, when SAB delisted the OK and the end of financial 1997, SAB pumped about R1-billion into recapitalising it, and it anticipated further cash demands. SAB will write off R600-million, representing the estimated carrying value of its investment, and said its 1998 earnings will only be affected by the first-quarter loss.
But the questions of how things went so wrong, what steps SAB had taken and if it had done enough have never been adequately answered. In fact, SAB management has always been defensive and even evasive when criticised about the OK.
If retailing is not SAB's forte and if it cannot effect change in its smaller investments, there is a strong argument for it to divest from all of its non-core businesses and let the experts take charge. Its expertise in beverages is unquestioned.
Some analysts say the trouble started soon after SAB paid R136-million to take 69% control of the OK in 1973. Meyer Kahn became CE in 1977, and when he moved to SAB head office in 1983, he was replaced by architect and property developer Gordon Hood.
They say Hood was clearly the wrong person for the job, and Kahn was reluctant to effect changes at the OK because of his emotional ties to the company.
In January 1993, Mervyn Serebro succeeded Hood and announced wide-ranging changes including management and financial restructuring, cutting down on head office and refocusing of product ranges.
In the year to March of that year, OK reported a attributable loss of R45-million, down from a profit of R9.4-million in the previous year. By November, SAB announced it would delist the OK after 60 years on the JSE. In the interim to end-September, the operating margin had dropped to a meagre 0.3%, the attributable loss was R39.9-million and gearing was at 250%. Not a pretty sight.
Three years down the line things have only got worse. In the year to this March, group turnover was 4% up at R6.4-billion "despite rightsizing actions and several store closures". Margins were severely eroded and bottom line losses were R74-million. Shrinkage, just one in a chain of woes, is believed to be double the industry average.
Checkers was in a similar sorry state when Shoprite bought it and Stuttafords/Greatermans for R55-million in 1992, but Basson seems to have succeeded admirably in the very areas the OK has not. He went about the business of cutting costs, improving disciplines, focusing on lowest prices and closing unprofitable stores.
In the year to June 1997, Shoprite posted a 26% rise in earnings to 32.3c a share on a 19.4% rise in turnover to R9.4-billion. Checkers is now a major contributor.
The deal will see Shoprite emerge as SA's largest food retailer, with a market share of more than 40%, with 400 stores and turnover of R16-billion.
Basson says Shoprite sees the acquisition "as an opportunity to expand its influence in the supermarket industry", and it has the management experience of turning these things around.
His projections are that the company will make a R250-million loss for the year. The debt position is manageable. "The R540-million in loans and shareholders equity which is ceded to us can cover us and leaves us 25 months to turn it around."
He says the OK's stockturn situation "is rather sad", and improvements in this area should see at least R400-million released out of excess stocks. "This should leave us with over R900-million to play with."
Basson says that at the March year-end there was a negative ratio between stocks and creditors. In this kind of business, stocks should at least be financed by creditors, and in most companies, creditors are double the value of stocks. In the OK's case, they are half.
"By March our systems should be operational, so stockturn and cash flow management should substantially increase. We only took business control on Saturday and are giving initial attention to major elements including curtailing head office, administration and advertising," he says.
There are six divisional directors working on numerous aspects. The buying structures are being collapsed and distribution is moving to a decentralised basis, says Basson.
Hyperamas, furniture and House & Homes will be run as in the past, but run on their own costs. "We will fund them properly and they must give a return. They will be focused with financial parameters."
OK stores which are loss-making will be fully integrated with the Shoprite group by the end of December. It is early days, but Basson's gut feel is that about two thirds of OK stores will change to Shoprite and Checkers. The OK will become predominantly a franchised business, he says.
Analysts were surprised Shoprite bought the whole of the OK, particularly the furniture interests. But Basson says he will wait and see if he can be successful with furniture.
"We bought the whole company. Furniture does fit in with our cash resource as we can invest in our own book. I say let's give it a shot of a year or two and after that we may decide to expand, bring in a partner or even buy another company if furniture proves to be a good fit."
Asked why he was interested while other major retailers, including Pick 'n Pay, were not, Basson says: "Some of us prefer blondes and some brunettes. It is all a matter of a company's cycle. We have achieved a 2% operating margin, our stores are up and running, streamlined. We have additional capacity. Africa is not going as fast as we would like and there are not millions of new sites available. To get to a growth phase we have to find stores and sign up new brands. We are trying to do whatever we can in food.
"OK is a company that has been bankrupt for numerous years. It is like a man with a Ferrari who cannot get it serviced. It has also been like a big pot of blame, shuffling between management, SAB and the various divisions. But there is nothing to indicate it is not a good buy."