AN innovation revolution, a new market segment, a dignified proposition: That’s Savanna Tobacco’s secret to sustaining the future.
Report by Forbes.com
It was a perfect storm for innovation: The price of tobacco products, the volatility of supply, the monopoly of the industry production pipeline and global markets came together in less than a decade to put sustainable cigarette manufacturing on the front burner.
The simple fact of the matter is that when Savanna Tobacco Company entered the market from a paltry threshing operation on the outskirts of Harare a decade ago, few imagined a successful enterprise fanning out across cities and towns of Zimbabwe, into neighbouring markets in the region and internationally.
It was even harder to imagine in a context of massive trade imbalances, haemorrhaging interest rates and hyperinflation on the back of a beleaguered currency, so much so that critics of the country’s indigenisation policy were tempted to find explanations for the spectacular success of Zimbabwe’s tobacco manufacturing output in “illegal cigarettes”. After all, the state of the Zimbabwean economy at the outset of the government’s indigenisation drive was hardly a postcard image of optimism.
Tight markets in an industry historically controlled by a handful of global behemoths made things worse. So when Savanna made its debut there were daunting impediments to competing in an industry where production costs and pricing made no sense for smaller players contemplating their prospects. But, as always, there’s a silver lining for forward-looking companies savvy enough to see it.
Within the first two years of operation, the company sold over three million kilogrammes of farm stems. The directors of Savanna by this time had already identified an opportunity to add value to Zimbabwean tobacco by manufacturing quality cigarettes for the export market.
That was only one part of a bigger success story, however. Formed in 2002 when Savanna purchased the Harare threshing plant, reconditioned plant machinery, started processing, packaging cigarette stems and selling them to a number of cigarette factories around the world, the company has become an emblem and harbinger of innovation. Having evolved over the past 10 years into a significant producer of tobacco products and brands in Zimbabwe, increasing its average monthly output from 3 000 master cartons in 2004 to between 35 000 and 40 000 master cartons per month, the spinoffs for a previously excluded market segment have been considerable.
Once Savanna had won a license to produce cigarettes, its early pioneers knew well that today’s tobacco industry presents challenges, but also munificent opportunities for those who care to look. From that point onwards it was a quantum leap to becoming a key innovator in the sector.
The logic was brilliant in its simplicity: While demand for quality products will eventually grow, so, too, will the demand for innovation and sustainability. The real challenge was to circumvent onerous pricing models and gain market share. Yet, there was in Savanna’s early days a keen sense that saving money was just for starters. If the bottom line was important, so too were people, the company’s founders decided. They reasoned that the big business case for innovation is that there is, indeed, big business in innovation for companies that go about it wisely.
This doesn’t just mean sustainable sources of tobacco supply; it means using traditional sources in more efficient, more inventive ways. The solution was to change the marketing model — and, in the process, revamp the production model by devising ever smarter means of circumventing accepted market wisdom.
One innovation was to revolutionise the traditional pattern of packaging. Instead of mimicking competitors — a path that would have led to failure — Savanna switched to new low-end target markets and cost efficient packaging with smarter technologies imported from Europe and adapted to African markets. But there was a prior step that may very well have gilded Savanna’s business strategy with the edge of predictability. After surveying the African market, a gap emerged.
The consumption needs of a glut of the African market, the company realised, was peripheralised in the sale of loose cigarettes that did not give consumers the dignity they deserved. Low-income consumers were forced to purchase cigarette sticks at local vendors on street corners — often resulting in the unhygienic handling of products. This was no more apparent than from a recent typhoid outbreak in Zimbabwe that spread through vendors selling unhygienic and unpackaged products.
Savanna’s remarkable innovation was a world first in tobacco packing. Packs of twos, fives and tens were introduced at lower cost. It was, to all intents and purposes a genuinely African solution to an African challenge.
Thus by tackling the pricing challenge in ways that foster sustainability, Savanna not only kept pace in a tough business environment, but pulled ahead to find new efficiencies, develop new technologies, and build new markets. Sceptics need only look at the latest buzz for packs of two’s and five’s — something that had not occurred to cigarette manufacturers before.
For a while, the tobacco success story even led some of the most virulent sceptics of indigenisation to reassess the legacy of Zimbabwe’s policies. To put this in historical perspective, when Savanna Tobacco entered the tobacco sector, the prevailing atmosphere was grim; the foreign currency surrender requirements of the Reserve Bank of Zimbabwe in 2005, where companies were expected to sell 50% of their export earnings to the Reserve Bank of Zimbabwe would have sunk the company in less than four months.
The high foreign currency requirements were onerous. Savanna established a mechanism which later became known by the Reserve Bank as toll manufacturing, saving many exporting companies from ruin in Zimbabwe when it became a monetary policy.
The company itself bolted its future on pragmatism. Savanna’s factory was staffed by six South African Technicians and about 60 Zimbabweans. To date, the expatriates have all, except for one, been replaced by locals and the total staff complement stands at 185 permanent employees.
Today, with stubborn optimism and entrepreneurial skill almost 50 000 Zimbabwean farmers and their families are benefitting from the industry compared to 4 500 mainly white farmers in 2000, most of whom entered the industry in the past two years.