The two blue chips, whose combined annual gross revenues for the past reporting period topped US$1,3 billion or 16% of the country’s estimated GDP for FY11, earned total net profits after tax of US$166 million in the case of Econet and US$75 million for Delta. These massive profits are certainly no small change by any standards, but what drives the two companies’ performance?
While it is true that the two are in different industries, they have a few things in common.
The first common factor is the dominant and secure market leadership positions they command in their respective sectors, which some economists warn are reaching near-monopoly status. Econet recently disclosed that with more than 6,4 million subscribers, its market share is now more than 70% of the mobile telephony space.
Delta boasts more than a 90% command of the beverages market in Zimbabwe, effectively controlling both the locally-produced alcoholic and non-alcoholic beverages. The company also has interests in associate companies such as Schweppes Zimbabwe and African Distillers (Afdis) and holds an exclusive franchise for Coca Cola products in Zimbabwe, except in Manicaland where the franchise is held by Mutare Bottling Company (MBC). Incidentally, MBC is an associate of Econet.
Secondly, these companies have very deep pockets and are able to easily mobilise finance for their operations from shareholders and third party funders. The two have shown no hesitation at all in embarking on capital expenditure over the last three years. Econet invested a massive US$615 million into network expansion whilst Delta invested more than US$200 million into new capital plant and equipment.
Economist Professor Tony Hawkins said that Delta, given its market dominance, is now a virtual monopoly, while on the other hand Econet is approaching monopoly status as market data show that less than one third of the market is controlled by other players. Econet reportedly has 6,4 million subscribers whilst Telecel and NetOne enjoy the patronage of 1,8 million and 600 000 subscribers respectively.
Hawkins said the sustainability of these giant companies’ earnings going forward had challenges.
“Firstly, for Delta, it will become difficult to grow volumes as volume growth will be restricted by the growth in the domestic economy. In the medium term, Zimbabwe’s annual economic growth will be constrained to about 6% and Delta’s volumes will be restricted to grow within this range,”Hawkins said. He noted that Delta could not grow its market beyond Zimbabwe and the company therefore had to either diversify its product range or continue to increase prices to preserve margins.
He further noted that for Econet, teledensity was reaching saturation point in Zimbabwe and that was why the company had been diversifying its services, and developing new revenue lines.
“The big guys will find it harder and harder to grow their volumes. They also risk losing market share,” Hawkins added.
Delta is certainly at risk from new entrants if companies like Pepsi or Heineken come into the country. That would certainly affect Delta’s market share in a big way. Econet is however somewhat protected by legislation that limits the entry of new players into the telecoms sector in Zimbabwe.
Economic commentator Eric Bloch concurred that Delta was in fact a quasi monopoly, facing very little competition from within and without the country. He said the company had a near exclusive franchise from Coca Cola, and faced very little competition from imported products, giving it enormous leverage to play with prices.
Bloch, however, thinks that Econet on the other hand does have three significant competitors and would price itself out of the market if it attempted to use its market dominance.
He attributed Econet and Delta’s sustained investment into capital expenditure as being driven by the need to rapidly counter the effects of hyperinflation when companies lost time and could not re-equip themselves.
Delta, by its own admission, does have a measure of strength in influencing prices and availability of its products on the market. At the presentation of the company’s 2012 results, Delta’s group finance director Matts Valela said the company’s strategy is to grow its revenues faster than volume growth. Delta grew its volumes by 19% whilst revenues were up 36%, meaning the price increases accounted for the extra revenue growth. He argued the company was not fully supplying the market and was in fact “leaving money on the table”.
An investment analyst views this strategy sceptically, saying that it is not feasible in the long run for the company to continue to effect price increases.
“There is a limit to the extent to which the company will grow revenues via price increases. It is good that the company realizes that it will have to find a way to increase profitability by lowering unit costs and increasing volumes,” the analystsaid.
In a research report released on Wednesday, MM Capital Research also believes that Delta’s future revenue growth will be underpinned by volume growth.