Operating profits buried under debt: Why ACI is pumping Tk700cr into Shwapno

Highlights:

• Chattogram wholesale sugar prices rose Tk200 per maund in two weeks
• Traders blame gas and power shortages for tightening sugar supplies
• S Alam's production suspension has further worsened Chattogram's supply shortage
• Dhaka-sourced sugar carries additional transport costs, raising wholesale prices
• Traders allege large mills may be regaining market control
• Consumers fear tighter supplies could eventually push retail prices higher

ACI has approved a Tk700 crore investment in its retail subsidiary, ACI Logistics Limited, the operator of Shwapno supermarket chain, through 70 lakh convertible preference shares.

For years, Shwapno has been widely perceived as a loss-making concern. Its latest audited financial statements, however, show a more nuanced picture: the retailer is generating operating profit, but heavy financing costs are pushing it deep into the red.

Approved at ACI's 230th board meeting on 14 July, the investment is to be completed by 15 October, subject to regulatory approvals. The move is aimed at strengthening Shwapno's capital structure rather than simply funding store expansion.

According to Shwapno's FY2024-25 audited accounts, the company generated Tk2,650.3 crore in revenue, Tk40.1 crore in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) and Tk21.38 crore in EBIT (Earnings Before Interest and Taxes). Yet it reported a Tk271.2 crore pre-tax loss, as financing costs reached Tk292.59 crore.

Infograph: TBS

Shwapno carried Tk1,540.2 crore in inter-company borrowings and Tk539.24 crore in bank debt, taking total borrowings above Tk2,000 crore.

A profitable operation, costly capital structure

Shwapno Managing Director Sabbir Hasan Nasir, speaking to The Business Standard, said the numbers show that the company's core retail operation is not loss-making.

"Shwapno became EBITDA-positive in FY2018-19 and has been EBIT-positive since FY2021-22. That means our retail operations are already profitable," he said.

"When people describe Shwapno as a loss-making company, they are referring to profit before tax. The losses arise after operating profit because of financing costs. This is essentially a balance-sheet problem, not an operational one."

Nasir said the problem is particularly acute because grocery retail is a thin-margin business. Global supermarket chains typically operate with net margins of around 2-3% and EBIT margins of roughly 3-4%, making high-cost debt difficult to sustain.

He cited Walmart's debt-to-equity ratio of around 0.55, saying global grocery retailers generally maintain much more conservative capital structures.

"An EBIT margin of 3% or 4% simply cannot support bank loans carrying interest rates of 9%, 12% or even 15%," he said.

Tk700 crore to repair the balance sheet

ACI's investment is therefore intended primarily to ease the financial burden created by years of debt-funded expansion.

Nasir said the restructuring would strengthen Shwapno's equity base and allow more of its operating earnings to flow through to the bottom line.

He expects Shwapno to become PBT-positive within the next few months if the current trend continues, with full-year profitability expected the following year.

Ashikur Rahman, principal economist at the Policy Research Institute (PRI) and member secretary of the Bangladesh Economists' Forum (BEF), broadly agreed that the capital structure is a major issue.

"The Tk700 crore investment can be highly consequential provided that a substantial portion is used to retire expensive debt and reduce financing costs," he said.

Shwapno's positive EBITDA and EBIT, he added, suggest that its underlying retail operations are "not fundamentally unviable."

"Financing costs of nearly Tk293 crore completely overwhelmed an EBIT of only Tk21 crore. A meaningful reduction in debt could therefore improve cash flow, restore balance-sheet stability and provide the company with breathing space."

But Ashikur Rahman cautioned that recapitalisation alone would not ensure a sustainable turnaround.

"Grocery retail is a low-margin, highly competitive business," he said, adding that Shwapno must also improve store productivity, inventory turnover, procurement efficiency, logistics, technology adoption and working-capital management.

He said the investment should primarily be viewed as a balance-sheet restructuring exercise rather than a conventional expansion investment, with its success ultimately measured by whether financing costs fall and the company achieves sustained positive operating cash flow.

Why Mitsui is betting on Shwapno

The financial restructuring comes as Japanese trading and investment giant Mitsui & Co moves to invest in Shwapno, although the amount and valuation have not been publicly disclosed.

According to Nasir, Mitsui spent nearly three years evaluating Shwapno before deciding to invest. Its teams, including specialists with experience at 7-Eleven, reviewed stores, operations, employee training, category management, logistics and supply chain systems.

"They looked beyond the financial statements. They assessed our operational discipline, hygiene standards, learning culture and ability to innovate," Nasir said.

He said Mitsui concluded that Shwapno had the operational platform, management capabilities and footprint needed to scale in Bangladesh's roughly $20 billion grocery market.

Why a franchise model still needs big investment

Shwapno now operates 961 outlets, many through franchise or partner-led arrangements. That raises a basic question: if franchise partners bear much of the cost of opening stores, why does the retailer need hundreds of crores in fresh capital?

Nasir said the major investment requirement is increasingly behind the stores.

The company plans to expand warehousing, distribution, cold-chain infrastructure, automation, AI, IoT and e-commerce systems to support a much larger network.

"Opening stores is only one part of the business. As the network grows, investment in logistics, technology and the supply chain becomes even more important than investment in the stores themselves," he said.

Future investment could also extend into backward linkages, including farming and agricultural sourcing, with the company seeking equity partners rather than relying on expensive debt.

Beyond its own stores, Shwapno plans to connect neighbourhood grocery shops to its software and supply-chain network, allowing smaller retailers to benefit from organised procurement, technology and data-driven inventory management.

The broader ambition is to help modernise Bangladesh's fragmented retail ecosystem, rather than simply expand Shwapno's own store count.

For now, however, the more immediate test is financial.

Shwapno has built a retail operation that is generating operating profit. The Tk700 crore capital injection could give that business room to breathe – but whether it produces a lasting turnaround will depend on how much financing costs fall and whether the company can improve the underlying efficiency of a notoriously low-margin business.