Botswana’s businesses target regional expansion

In the face of a liquidity-strapped domestic market reaching saturation, Botswana’s most ambitious companies are looking to other parts of Africa for growth. 

Botswana is often held up as one of Africa’s economic success stories, having risen up from one of the world’s poorest countries at independence to an upper-middle-income country today.

Much of this was achieved on the back of the discovery of diamonds, but the country has also seen the emergence of successful home-grown businesses in a range of sectors. However, with a population of just 2m people and fast declining liquidity in the banking industry, it is becoming more and more clear to businesses that they may need to pursue markets further afield if they are to continue growing.

It’s not surprising then that an increasing number of domestic Botswana Stock Exchange (BSE) listed companies are scrabbling to establish foreign operations.

One of those leading this charge is the consumer lending company Letshego Holdings. Established in Botswana in 1998 and listed on the BSE in 2002, the company is now active in no fewer than nine countries in southern and eastern Africa.

According to Letshego’s financial results for the 11-month period up to 31^st December 2014, the group’s profits before tax exceeded the $100m mark for the first time in its history – and 60% of these profits were generated outside Botswana.

“One of the key factors we look for when identifying new markets for expansion is potential growth,” says Chris Low, Letshego’s group’s managing director. “For us, growth is going to come from population growth and diversity of economy. So while Botswana, for instance, has got resources, beef and tourism as major economic drivers, bigger economies such as Kenya also have resources and tourism but in addition to that have manufacturing and a whole load of other elements in the economy.

“And that in itself provides more opportunity by virtue of the diversity for growth at the bottom of the income pyramid, which is where our business is focused.”

While the lion’s share of Letshego’s loan book is still in Botswana (35%), Namibia (24%) and Mozambique (20%) are not far behind now and are growing steadily. Meanwhile, the company’s East African operations have great potential, with Kenya registering the fastest growth of the period at 139%.

“From a shareholder’s perspective, expansion [across Botswana’s borders] is a plus,” says Tshepo Setlhare, research analyst at the securities house Stockbrokers Botswana. “Given that the Botswana market is fairly limited, expanding into Africa brings higher turnovers for these companies, which means higher returns for shareholders in the long run.”

Setlhare adds that regional expansion has the further benefit of making a company more visible to the international market, drawing more interest and attracting more funding as a result. “It increases brand equity and goodwill, so it adds a lot of value to the shareholder if the expansion is done right.”

Another company conducting a proactive push into Africa is Choppies, Botswana’s leading supermarket chain. Choppies has a 36% market share of the country’s national food retail market, but has also engaged in a bold cross-border expansion and now has some 125 stores spread in three countries: 72 in Botswana; 35 in South Africa; and 18 in Zimbabwe.

Choppies Group CEO Ramachandran Ottapathu has indicated that the company has set itself the goal of reaching 200 stores in six different countries by December 2016.

This is an ambitious target, but one wouldn’t necessarily want to bet against a retail behemoth whose growth has already astounded critics. The company went from recording revenue of $162m between June and December 2011 to $300m during the same period in 2014.

Specifically, Choppies has targeted Kenya, Tanzania and Zambia as the next three markets to enter and has already placed a bid to acquire 10 stores in Kenya, valued at close to $10m, from the established Ukwala supermarket chain.

In late May, Choppies also made a secondary listing on the Johannesburg Stock Exchange. According to Ottapathu, the listing is intended to give the company a platform to continue its expansion as well as enhance the company’s public profile in South Africa, where it continues to expand its footprint.

According to Kabelo Moyo, Principal Consultant at KPMG Botswana, the biggest growth region on the continent looking forward will be East and West Africa. “If you look at the economic figures, the highest growth areas are north of us but gone are the days of just looking at one country,” he says. “You need to look at regional areas in order to maximise your
investment.”

Moyo believes that while South Africa will remain an attractive investment destination, especially for service sector operations due to the country’s developed infrastructure, it can’t be ignored that Nigeria has overtaken it as the largest economy in Africa.

This, says Moyo, is just one of many indicators that the tide of investment will turn towards the west and east of the continent.

Uncharted territory

However, as appealing as foreign expansion may be, there are, of course, many challenges that come with entering other African markets.

One problem is that some African countries are politically unstable. For instance, Letshego established operations in South Sudan but pulled out of the country due to concerns of civil unrest, which had the potential to endanger staff. Meanwhile, property company RDC owns a four-star lodge in Madagascar which is yet to achieve profitability years after opening, due in large part to the political instability that country has experienced in recent years.

Government regulations particular to certain countries are also a potential hindrance to progress. Another property company, PrimeTime, experienced challenges in its bid to acquire property in Zambia due to regulation changes that made the environment tough for foreign investors. Meanwhile, Choppies had to ensure the majority stake in its Zimbabwe-based stores is owned by Zimbabweans in order to comply with the citizen empowerment laws of that country.

Nonetheless, Botswana companies have now dipped their feet into the water and following the success of many, there’s reason to believe these are just the early warning shots of a growing trend. Just as South Africa has so effectively done for decades, Botswana may be able to ensure sustained economic growth by spreading its own unique brand of businesses across sub-Saharan Africa and, perhaps, beyond.

Kibo Ngowi