Imports squeeze life out of local retailers

GOVERNMENT should protect the stuttering retail sector until it is on its feet again as high operating costs wipe out revenue, analysts have said.

Economic analysts this week told businessdigest that unfair competition from foreign owned retail chains and high operating costs were stifling recovery plans of local retailers whose businesses
were curtailed by years of hyperinflation and arbitrary price controls.
Operating costs have been high for retailers owing to intermittent power supplies, obsolete infrastructure, high cost of maintenance and expensive utilities.

Importers enjoy a zero tariff regime on all foodstuffs which has resulted in a glut of foreign products filling the shop shelves, leaving traditional retailers with no option but to sell at very low profit margins to remain competitive.
Last week, Zimbabwe’s second largest retailer, OK Zimbabwe, blamed intense competition that emerged after the proliferation of retail shops since the use of multi currencies last February as the cause of the very low profit margins they realised.

After generating US$187,5 million in revenue, a rare feat in the current economic environment, OK Zimbabwe made an operating profit of only US$2,5 million. This means that the retail giant made a gross profit margin of 1, 3% during the year ending March 31 which resultantly prompted management to withhold any dividend.

Overhead expenses, according to the company’s financial statements, accounted for US$27, 8 million or 14% of revenue largely driven by staff costs.

“The profitability of the company was seriously affected by the unprecedented high levels of shrinkage experienced during the year and unusual mark-downs caused by price reductions to match competition as well as fridge failures emanating from frequent power cuts,” reads a statement accompanying OK financials.

So intense has the competition become in recent months that almost every supermarket in town is carrying out  promotions with “knock-down” prices to lure customers.

However Chris Mugaga, an independent research analyst, believes government should ensure local retailers have a competitive advantage over foreign shop owners.

“Government should implement a policy that ensures that foreigners are not offered trading licences for grocery shops. This exposes loopholes of the indigenisation policy,” he said.
Government in January gazetted empowerment regulations that compel foreign-owned companies worth US$500 000 or more to “cede” controlling stakes to locals.

But with most retailers valued below the empowerment threshold, most companies are unlikely  to be affected by the regulations.
Zimbabwe National Chamber of Commerce research economist Kipson Gundani said competition in the retail sector resulted from lack of “stringent regulations” for new investors.

“The sector is porous — there are no stringent regulations as seen by the proliferation of many shops with some unlicensed’, Gundani said.
He added that following the liberalisation of the economy last year, most investors now prefer the retail sector due to its low risk, high chances of getting short-term loans and a relatively high rate of return.

Another analyst said the poor performance of some retailers should urge companies to restructure and employ modern cost management structures.
“Most managers could be failing to employ effective cost management structures under the prevailing multi-currency system. They have to employ strategies employed in developed countries.” said a corporate finance analyst working for a local merchant bank who asked for anonymity.
The past year has seen new players such as AfroFoods and Mr Price fighting for market shares against traditional leaders, TM Supermarket, Spar and OK.

The new players successfully penetrated the market buoyed by relatively lower prices, which according to analysts, are derived from economies of scale that most local brands are not enjoying.
Consumers on the other hand could face the brunt of a non-tariff barrier as prices are expected to surge should government impose the restrictive measure.

While the retail sector is yet to realise the benefits which came with a relatively stable economy brought by the use of multiple currencies, there are manufacturers who have emerged out of the woods.

There was sweet news from sugar manufacturer, Hippo Valley, which posted US$23,646 million in the 15 months to March this year.
Hippo generated US$64,899 million in the period under review, meaning that the sugar cane growing and processing giant was pocketing about 36 cents for every dollar they made.
This shows that the sugar producer was doing by far better compared to retail giant OK which was earning slightly more than one cent for every dollar they produced.

Where others bemoan the presence of foreign products on the market, Hippo said: “The demand for locally produced sugar has remained reasonably firm, despite a general lack of liquidity and the presence of imported sugar on the market.”

Bernard Mpofu/Leonard Makombe

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