Dairibord results expose industry

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Dairibord has arguably been accorded the status of a success story. The company morphed from a parastatal dairy processor into one of the country’s few privatisation success stories. Today Dairibord is a listed corporation and as a relatively large, consistent performer, many consider it a blue chip company.

Report by Collins Rudzuna

Naturally therefore, Dairibord’s financial results are some of the most-awaited by stock market analysts.

Much-awaited as they were, Dairibord’s financial results turned out to be nothing to write home about. They were “neither here nor there” as some like to put it.

Volume growth across the company was 10%, and coupled with static consumer prices, this led to modest revenue growth of just 11%. Sales volumes in the foods unit were up 21% while beverages and milk volumes rose by just 10% and 4% respectively. Profit margins were slightly lower, resulting in profit growth of just 1% to US$7,2 million.

Management were at pains to justify to analysts, journalists and the investing public why their financial results were so subdued and to explain their plan for recovery. Some of the statistics given in the course of this explanation related to the national herd of dairy cows and the level of national milk production.

Zimbabwe’s dairy cow herd now stands at only 26 000, down from a peak of 119 200 in the 1990s. Correspondingly, milk production peaked at 257 million litres, but is now only 54 million litres. That is a decline of more than 78% for both measures! Taken in the context of an increasing population, the extent of decline in the dairy industry is shocking, to say the least.

Thankfully for Dairibord, since its days as a parastatal the product portfolio has been diversified from just milk to include a wide array of value-added foods and beverages. Profit contribution from these products now exceeds that from milk sales. Yet one cannot shake off the fact that milk remains the staple of the company’s existence. In recognition of this fact, Dairibord’s management is embarking on an ambitious new plan that it not only hopes will guarantee milk supply for the company, but perhaps revive the dairy industry as a whole.

Dairibord’s plan for revival of dairy farming involves acquiring heifers and loaning them out to farmers. In return, farmers will provide milk to the company. An initial batch of 250 in-calf heifers has already been disbursed to 10 farmers. An additional one million litres per annum is expected from this batch. Ultimately, the company hopes to import a total of 1 000 heifers. One cannot help but applaud Dairibord’s initiative in trying to solve the industry’s problem of a depleted herd. As the heifers calve, the herd will also continue to grow. Yet this ambitious plan is not without its potential pitfalls.

Farming has always been a business with many risks. For dairy farming, this risk is exacerbated by the fact that each animal represents a significant investment which has to be protected and managed with absolute care. The average cost for each animal imported by Dairibord is US$2 000. That is a lot of money to invest in an animal. Putting assets worth that much into the hands of third parties can potentially be ruinous should something happen to them. One hopes the animals are adequately insured.

Dairibord’s heifer programme is just the first step of many that need to be taken to restore the viability of the dairy industry.

A few new players have sprung up in the industry and they are giving Dairibord a run for its money. Kefalos, Dendairy and Alpha & Omega immediately come to mind.

If these and other players could also do their part to help replenish the national herd, that would be a good thing. They may even consider a different model, perhaps backward integration into dairy farming.

Increasing industry capacity solves only one of the challenges being faced by the local dairy industry. Another shortcoming that was exposed during Dairibord’s results briefing is the flood of imports from South Africa. Imports now make up a significant portion of milk consumed in Zimbabwe. In fact, imported brands of long life UHT milk are more visible than local ones in the supermarkets. This is not to blame the imports, which have bridged an unsatisfied gap between demand and supply. South African milk lands here at a lower price which cannot be matched by local producers, thus making locally-produced milk uncompetitive. A litre of imported milk lands in Zimbabwe at about US$1,05 while locally-produced milk costs US$1,20 — a gap of 14%. The difference emanates from local raw milk being more expensive to produce than in South Africa and the region in general. Raw milk costs 62 US cents a litre locally compared to 40 US cents and 44 US cents in South Africa and Zambia, respectively.

Dairibord has tried to bridge the gap by importing toll-produced UHT milk under its own brand “Chimombe”. Although this ensures the brand remains visible in the market, ultimately, it is still a cheaper import which makes local milk uncompetitive. Dairibord management admitted that this is a stop-gap measure, the ultimate goal being to revitalise local milk production.

Milk is an essential source of nutrition and government is unlikely to ban imports, especially where local production falls short of demand. Government could, however, investigate whether there are certain unfair practices by South African dairies which make their milk cheaper. Namibian dairy farmers, for example, once accused their South African neighbours of predatory pricing, using genetically modified feeds and on-exporting sub-standard Brazilian milk.

Dairibord’s results were indeed subdued; the market usually expects a more robust performance from blue chip companies. Most of the weaknesses are nonentheless external to the company itself and are more to do with the state of the dairy industry.

Dairibord has taken the bull by the horns and tackled some of these problems head-on. However,there is only so much that a company can do. Only when the industry can rebuild the national herd, produce enough milk to meet demand and lower production costs can it become competitive.

Meanwhile, consumers will have to remain content with imports. Local milk producers also have to deal with stiff import competition.

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