Zimbabwe's pricing dilemma

Zimbabwe's quest for economic competitiveness and new business is very much connected to market pricing of goods and services. Competitive prices incentivize suppliers through healthy profit margins while attracting adequate demand for acceptable levels of product quality. Key suppliers can be giant manufacturers, financiers, farmers, tourism players, engineering firms or thousands of SMEs that contribute over $8 billion to the local economy annually. Pricing is a key business component that can attract or repel capital injection in any economy.

Zimbabwe's annual inflation rate closed the year 2017 at 3.5% however the increases in prices and pricing models in our economy paint a disturbing picture on competitiveness. After the government implemented Statutory Implement 64 (SI 64) of 2016 which limited or prohibited the imports of locally produced goods into the country, our imports grew by nearly $300 million to close the year at $5 billion (formal imports only). It can be argued that the intervention brought life to the local industry which has been feeling the heat from cheap (not necessarily poor quality) imports from China, Botswana, Zambia and South Africa. Products that had started to disappear in the local market such as Cashel Valley, Softex, Sun Jam, Roil and Olivine found space in the shelves. Well placed manufacturers jumped on to seize the opportunity presented and increased capacity utilization through importation of equipment. However it is importation of consumptive goods that grew by $300 million to 22% of the total import bill, which means we are still in the hole as far as production is concerned.

The import restrictions however could not be sustained in their proposed format and had to be lifted outright in some instances as prices started to skyrocket towards year end. Faced with the prospect of food shortages and high inflation rates, RBZ had to intervene. The central bank continues to play this delicate act on key imports such as cooking oil, flour, fuel, industrial chemicals and other basic foodstuffs. Smuggling at our border posts is still growing as demand for foreign products grows. Retailers and local consumers still find it cheaper to import most products or raw materials from Asia and neighboring countries even after shielding unreasonable costs of road transportation. The reason is simple: our local products are not priced competitively. This reason has been the cause of declining export performance for the past 5 years as our exports have largely been restricted to minerals, tobacco and a few agricultural products that do not go on the production line.

Our exports in 2017 grew to $3.8 billion as a result of export incentives initiated by the apex bank. This export increase came at a cost of $300 million in export incentives to the country, which brings the important question on the sustainability of such interventions with the current production models. Export incentives are a worldwide phenomenon but in a different manner which brings in growth in production capacity for identified sectors or companies. Locally manufactured products struggle to compete with imports in the local market.

They still find it tough in the regional or international market. Others still argue that import restrictions are not necessary in Zimbabwe and are crippling certain producers who rely on the quality and guaranteed quantities of imports from regional suppliers. Key contributors to high prices for locally produced goods include:

High production costs

Charges for water, electricity, fuel, office space, transport and labour in Zimbabwe remain the highest in the region. Producers are then saddled with a huge tax burden after producing below capacity. These charges are directly passed onto the consumer through high prices on the final product. For instance ZESA charges 9.8c/kWh against a regional average of about 6c/kWh. The same applies to water which costs $80 per 1000 litres in Zimbabwe compared to an average of below $10 per 1000 litres in SADC. The same can be said for taxes, labour and transport costs which are reflected in the final prices charged in the market. The local consumer is squeezed as the liquidity crisis continues, the option will be to look for cheaper products from other countries than flood the streets. This scenario has led to massive job cuts, tax evasion and closure of big businesses locally as SMEs take over, since most small businesses operate in the open and default on tax payments. For instance, after sheltering the above costs Edgars or Truworths cannot compete on pricing with a city boutique or street vendors which sell imported ware. The same can be said for Sable Chemicals, Merlin, Caps Pharmaceuticals, Waverley Blankets and Dairibord who each day are caught between a rock in charging high prices to survive and a hard place of competing with a quality imports which are competitively priced.

Sub-Optimal production

Local producers still face internal business optimization challenges that affect pricing of their products. Cost of maintaining production equipment, import and transportation costs, software licenses, labour and cost of sales are not spread on adequate production units (optimal production scale). This aspect cuts across private and public entities alike. The few Zimbabwean companies that excel in terms of production efficiency are the same that expand into the region and are often labelled as monopolies by their peers locally. Low capacity utilization or limited output leads to an inclination towards profiteering on a few units to cover all production costs which is short term. Big businesses find optimal levels of production that enable them to attain economies of scale while improving production quality and maintaining competitive prices.

Victor Bhoroma is business analyst with expertise in strategic marketing and business management aspects. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or Skype: victor.bhoroma1.