Market dynamics: Threat to businesses key-lines

Zimbabwe’s market dynamics continue to threaten businesses’ key lines such as volumes, turnover and profitability as the operating environment remains challenging, characterised by exchange rate volatility.

Liquidity challenges in both the local and foreign currencies also continue to persist, coupled with elevated interest rates.

In addition, economic output has remained constrained due to the El Nino-induced drought, which negatively impacted agricultural output and led to reduced power generation, resulting in the cost of power supply remaining elevated.

Investment analyst, Enock Rukarwa, told Business Weekly that as the operating environment remains challenging for most sectors, the most optimal strategy in the short to medium term is to balance revenue maximisation and capital preservation.

“Key in such obtaining circumstances is to control operational expenditure and focus on high-margin product lines,” he said.

According to a Confederation of Zimbabwe Industries (CZI) business environment insights report, most businesses recorded an overall decrease in turnover by an average of 4.2 percent in the half-year to June 2024.

The CZI report shows that in terms of profitability, most companies are facing declines, signifying that the operating environment has been difficult for businesses and margins are shrinking. Economist, Dr Prosper Chitambara, said part of the problems that businesses are facing relate to issues to do with low aggregate demand in the economy caused by the macro-economic challenges currently facing the economy.

“Therefore, most businesses are in a very difficult situation. We have seen some formal retailers that have closed some of their branches because of the challenges within the operating environment, and these challenges are exogenous,” he said.

Dr Chitambara added that in as much as they try to enhance efficiencies through different cost-cutting measures, ultimately, they require a macroeconomic environment that is stable.

“Even looking at our tax regime, I know the Chamber of Mines of Zimbabwe did a study that has shown that the effective tax rate in the mining sector is 69 percent, which is way higher than the average for the sub-region at around 55 percent,” he said.

According to CZI, the various companies and businesses are facing the same problem, but it just manifests itself differently and it’s all around the pricing of foreign currency.

The businesses are constantly tweaking operational models with a major focus on costs as part of contingency strategies to keep their companies afloat.

Victoria Falls Stock Exchange (VFEX) listed Edgars Stores Limited, recorded reduced volumes and turnover for the 26 weeks ended July 7, 2024, indicating that significant pressures on disposable incomes resulted in reduced retail volumes.

“Under the circumstances, food security issues generally take precedence over clothing. As a result, total group units sold declined by 22.4 percent from 1.09 million to 0.85 million compared to the same period last year.

Revenue decline was contained at 15.4 percent over the prior half year at US$16.1 million against US$19.0 million in 2023,” the company noted. General Beltings, a Zimbabwe Stock Exchange (ZSE) listed counter in its half-year financials, said notwithstanding government measures, local cost structures are still uncompetitive relative to regional and global trends due to the increased dollarisation in the economy, which among others included utility costs.

British American Tobacco Zimbabwe, a manufacturer and distributor of tobacco products, in its recent financials said it sustained its comprehensive cost reduction initiative aimed at optimising operational efficiency and maximising earnings in the nine months to September 2024.

The cost management strategy is particularly crucial as the company navigates one of its most challenging phases, characterised by the influx of new cigarette brands, the dumping of low-cost alternatives and an inflationary environment that erodes consumer disposable income.

Economist, Victor Bhoroma, told Business Weekly that companies are largely hamstrung by a punitive business environment, high inflation, inconsistent monetary policy and a volatile economy.

“As such, there is no way out of the ever-increasing cost of doing business locally. Firms have to adapt and evolve within the space provided or risk closing shop,” he said.

He noted that businesses, particularly the manufacturing sector in Zimbabwe, are in need of serious re-tooling to modernise their equipment in order to be competitive.-ebsinesweekl