Sri Lanka’s loss-making Lanka Sathosa to sell high margin goods to get into black
ECONOMYNEXT – Sri Lanka’s loss-making state-run retail store chain Lanka Sathosa, which has made billions of rupees of losses amid allegations of chronic mismanagement and corruption is hoping to get into profits this year by moving to higher margin products, an official said.
"We have to sell essential goods below cost because as a state enterprise we are required to do so," current Lanka Sathosa Chief Executive S. H. M. Faraaz told journalists on Wednesday.
"We have a duty to provide a service by easing the cost of living, but we realise there is a mismatch we need to fix to become profitable."
But critics, including Sri Lanka’s Auditor General, have revealed that there is more to LakSathosa’s losses than simply selling goods below cost at tax-payer expense.
LakSathosa and the Co-operative Wholesale Establishment before that, had made chronic losses amid mismanagement and gone through repeated ‘restructuring’ and bailouts at people’s expense.
A Finance Ministry report in 2018 said there were stock losses of 2,331 billion rupees in 2016, and 1,845 billion rupees in 2017.
Sri Lanka’s Auditor General had revealed that LakSathosa imported billions of rupees of rice in 2014 and 2015 amid questionable procurement from India, kept them in container yards paying fees, until weevils and insects grew on them and sold them for animal feed.
LakSathosa’s losses are eventually bailed out by the Treasury, burdening people who pay taxes on foods, import duties and value added tax, including on medical services.
The retail chain reported a 4.5 billion loss in 2016, according to the Ministry of Finance. The loss contracted to 2 billion rupees in 2017.
The state-run retailer is now trying to sell more high-margin grocery items in order to be profitable.
"As a state organisation we have to sell essential food items at cost which account for 60 percent of revenue," Faraaz said.
"During festive seasons we sell at a loss because the government wants to ease the burden on the people.
"We realize there is a mismatch that’s preventing us from becoming profitable, with high-margin goods accounting for around 40 percent of total revenue.
"We want to increase the share of high-margin consumer goods which can give us margins of around 15 to 16 percent to at least 50 percent of total sales," he said.
Faraz says LakSathosa cut costs by 15 percent in 2017 by deploying technology such as an enterprise resource planning system, and introducing controls to cut waste, staff and logistics costs.
Lanka Sathosa is yet to publish annual accounts for 2016 and 2017, which are being finalised, the CEO said.
Lanka Sathosa reported a 23 percent growth in revenue to 17 billion rupees during the first six months of 2018 from a year earlier, with unaudited profits somewhere around 45 million rupees, Faraaz said.
"This was in a period which saw the retail trade industry fall 12 percent, so some of our initiatives are working," he said.
Lanka Sathosa is planning to expand the retail chain by another 100 over the next few years mostly in the once-war torn North and East.
Also, 20 ‘mega stores’ which will include a wider range of consumer goods and have banking and dining facilities will be opened to rival private sector super market chains like Arpico, Cargills and Keells Super (all three operated by listed companies)
"We have to improve our service standards and give our customers a unique experience so we can compete with private sector supermarkets in the modern trading space," Faraaz said.
"By the end of 2018 we will return to profit and will no longer depend on Treasury support."
The retail chain will also introduce Green Lanka Sathosa outlets with organic produce and plastic-free packaging.
It will also open spaces for small and medium businesses to sell their products.
December 2017, the Treasury had also given a letter of comfort for 1,338 billion rupees to People’s Bank and 6,547 billion rupees to the Bank of Ceylon for unpaid loans.
It is not clear whether the loans had been settled by the Treasury.
The Ministry of Finance requires state-enterprises to adopt key performance indicators to improve their financial performances and make them commercially viable.
In 2017, five state enterprises adopted KPIs including Ceylon Petroleum Corporation, Ceylon Electricity Board, Sri Lanka Ports Authority, Airport and Aviation Services Limited and National Water Supply and Drainage Board.
Ten more state enterprises will adopt KPIs in 2018, including Lanka Sathosa. (COLOMBO 19 July 2018)