How Shwapno heads towards full break-even

A rapid, asset-light national-level expansion, deeper ties with more consumers, and the launch of a full-fledged e-commerce platform for strong omnichannel retailing will make Shwapno profitable in a few years, said the retail chain's managing director Sabbir Hasan Nasir.

Additionally, the company is considering converting its debt from the expansion into equity to lower its finance costs, he said.

Sabbir Nasir, who has led the country's largest and fastest-growing retail chain since 2012 as the executive director, recently became managing director. He shared the growth plan in an interview with The Business Standard.

Shwapno's operator company is ACI Logistics Ltd, a subsidiary of the country's top tier publicly listed conglomerate ACI Limited which has a consolidated annual revenue of over Tk12,000 crore.

He said that modern retail chains gain momentum in line with the adaptability of the middle-class consumers when their per capita income grows and urbanisation attracts them to buy everything from a single outlet.

Supermarket investors in the 2000s rightly began betting on the rise of a robust middle and affluent class in Bangladesh.

However, supermarkets in the country faced unfair taxation just before their growth took off a decade ago. The industry still struggles to make the government understand how the 5% VAT on packaged goods, which only superstore customers have to pay, is harming organised retail of daily essentials.

Shwapno entered the market in 2008 as the third major superstore chain, following Agora in 2001 and Meenabazar in 2002. Shwapno outpaced others and quickly expanded its network of stores. Customer response was strong until the extra VAT on packaged products from supermarkets was imposed in 2013, according to Sabbir Nasir.

Shwapno continued pursuing its mission to build a nationwide network. The number of its own large outlets surged to 86, while Agora and Meenabazar slowed down, operating 23 and 34 metro city outlets, respectively.

The expansion of the store network and gaining more loyal customers – over 90,000 every day – came at the cost of huge capital expenditure and continuous sacrifice of profitability, as the superstores have to compete with traditional neighbourhood shops that do not charge VAT, he said.

At the end of the 2022-23 fiscal year, Shwapno's accumulated loss surpassed Tk1,600 crore. Debt servicing has emerged as a major pain point for the fast-growing business, despite maintaining a decent double-digit gross profit margin for a long time and achieving some operating profit in the last two years.

In the past fiscal year securing a one-third growth to Tk1,832 crore in revenue, Shwapno earned a Tk13 crore operating profit. However, a gigantic Tk154 crore in interest expense added to the accumulated losses.

Meanwhile, as a solution Shwapno collaborated with franchise partners across the country who themselves invest to build new stores, run them under strict Shwapno supervision and active partnership for the sake of standards harmony, said the managing director.

Currently, with over 480 stores, including more than 390 franchises, Shwapno has reached 62 districts. Despite thin profit margins, around 80% of the franchises are earning 30%-60% of their invested capital annually, according to Sabbir Hasan.

He added that Shwapno is working to raise the percentage of profitable franchises to 95%.

Shwapno's own superstores are adding 7%-8% of the turnover to the company's bottom line, compared to around 2% from the franchise stores.

Unlike supermarkets, e-commerce in Bangladesh is subject to a VAT on the retailer's gross profit margin only and Shwapno has already built an e-commerce subsidiary for a strong online presence soon.

"There is a big headroom for modern retail, if the government, industry and consumers think alike for a transparent, efficient and disciplined value chain," said the Shwapno MD.

Of the estimated $18 billion retail market in Bangladesh, modern retail's contribution is stuck at around 2%. Sabbir believes that if the industry can capture a decent 10% share by 2030, the growth potential is huge.

Securing a 26% growth and over half of the market share, Shwapno posted a revenue of over Tk1,664 crore in the first nine months of the current fiscal year. However, rising interest rates are hurting the company even more.

The cost of debt servicing in the nine months surged to nearly Tk150 crore, up from Tk110 crore during the same period last year. As a result, net loss increased by a third year-on-year to Tk132 crore, despite an improvement in store-level profitability.

Now, with the growing scale of our omnichannel retailing network, Shwapno should reach financial break-even within the next 3-5 years, depending on the economic scenario, he said.

Mahfuz Ullah Babu is a Special Correspondent at The Business Standard, covering financial markets, business, private sector development, IT, automobile and the tech industry for the past decade. He can be reached at [email protected]