Companies tweak operational models as a survival strategy

Zimbabwe’s businesses are constantly tweaking operational models with a major focus on costs as part of contingency strategies to keep their companies afloat in a volatile operating environment.

The country’s business operating environment has been characterised by difficult circumstances that include inconsistency of policies, currency issues, electricity shortages, a rigid tax system and export surrender ratios, resulting in the unstable socioeconomic situation that makes it difficult for businesses to operate.

These major challenges have necessitated the need for businesses to structure themselves in order to survive the unfriendly operating environment.

Nampak Zimbabwe, a company engaged in the manufacturing of paper, plastic and metal packaging products, said in its recent financial update that the operating environment remains uncertain given the ongoing liquidity challenges.

“The group will continue to focus on cost containment measures in order to preserve margin and improve profitability across all the businesses,” it said in an update for the quarter ended June 30, 2024.

The company said the economic environment continues to show signs of strain with the El Niño-induced drought having had an adverse effect on the agricultural season.

“Power shortages, particularly at the Ruwa plant, affected the operation, resulting in the increased usage of generators to meet customer demand. But the third quarter under review was largely affected by tight liquidity following the introduction of the new ZWG currency on April 5, 2024,” the company said.

It noted that despite the tight liquidity, which affected volume offtake in some product lines such as High-Density Polyethylene (HDPE) and commercial cartons, overall volumes for the third quarter were 2 percent up compared to the prior year period,” reads the trading statement.

Businesses have been struggling to liquidate their local currency on the official forex exchange market, negatively impacting working capital while relying on expensive short-term borrowings.

The situation is being compounded by high interest rates and power shortages, which are driving companies to adopt expensive alternative energy sources, which in turn eat into growth and margins.

ART Corporation says the economic environment is expected to remain difficult with inflation, currency instability, and erratic power supplies to continue weighing down growth opportunities.

“As a result, the group will continue to take the tough decisions necessary to protect the business and its sustainability beyond the current situation,” the company said.

It noted that the reduced debt levels will provide the group with the necessary headroom to navigate any market headwinds and provide it with the flexibility to accelerate investment in higher margin businesses whilst reducing exposure to declining market segments.

ART Holdings, listed on the Zimbabwe Stock Exchange (ZSE), manufactures papers, pens and lead-acid batteries in Zimbabwe and distributes them throughout Southern Africa.

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.

Financial economist, Malone Gwadu, told Business Weekly that businesses, particularly the manufacturing sector in Zimbabwe, are in need of serious re-tooling to modernise their equipment in order to be competitive.

“Outdated technologies currently in our market increase the cost structure and by derivation, business costs, which are in US dollars; hence, retooling is quite key in arresting costs that render our local produce uncompetitive,” he said.

Gwadu said the electricity situation is unfortunately here for a while until the necessary interventions are finished, such as the Hwange power plants.

“Alternative sources may need to be considered, especially solar energy. We have abundant solar power, which we are not utilising beyond household level even for our industries,” he said.

Proplastics Limited, in its recent financials, said it expects the operating environment to remain challenging due to liquidity constraints and the continuing effects of the devastating drought in the region.

However, the business has put in place initiatives to recover in the second half of the year. Enock Rukarwa, an investment analyst, however, said the challenge is not working capital expenditure being in foreign currency but the mismatch in exchange rates on the production and marketing sides.

He said costs are pegged at alternative market rates, yet finished products are distributed at a subsidised formal exchange rate.-ebsiensswekl