THE news that Metro Peech & Browne, a wholesaler of Fast Moving Consumer Goods (FMCG), had been placed under corporate rescue surprised the market.
Although it is apparent that formal wholesalers and retailers, not only in the FMCG but across board in Zimbabwe are going through hard times, the degree had not been really quantified.
Although the informal sector in Zimbabwe has been around for a while, I opine that Statutory Instrument 85 of 2020 exacerbated it.
The instrument essentially forced economic agents to transact at the official exchange rate, with a marginal allowance to deviate.
This has made the pricing of goods and services by formal retailers less competitive against their competitors in the informal sector, who sell directly in foreign currency and have way fewer overheads.
Although the above-described challenge is systematic across the industry, some peculiarities to Metro were laid out by the Corporate Rescue Practitioner (CRP) in the report to the master of the High Court that we will discuss and analyse in depth in this article.
High gearing
Debt is like a double-edged sword, appropriately utilised can propel to company to grow but also has the potential of sinking down the company.
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Under an inflationary environment, borrowers usually benefit from borrowing today, and repaying when the money has lost value, but that is also speculative because you might actually end up paying more if the interest rates are adjusted like what the Reserve Bank of Zimbabwe (RBZ) did in 2022.
For an FMCG company, I opine that high leverage ratios are a red flag since there is no justifiable need for the company to accumulate such debt, except for speculative reasons.
Stockouts
Typically, wholesalers have separate and unique arrangements with suppliers of the goods that they distribute via their shops.
Bigger wholesalers like Metro, which had a branch network of 20 at its peak, dotted across the country and is now at 15, usually have bargaining power to negotiate lucrative trading terms as opposed to cash purchases.
However, given the inflationary environment and the fact that formal wholesalers are obliged to accept local currency, they are slowly becoming unattractive to suppliers.
Listed companies, who are suppliers of dairy and other beverages are on record telling analysts that they have found a quicker route to cash, which essentially is selling to the smaller and informal retailers who pay cash and in foreign currency.
It becomes incumbent upon the formal wholesaler to be innovative and convince the suppliers that they are value to distribute their goods via their channel.
They do this by advertising, promoting some of the products and also sharing part of the foreign currency sales that they make with the suppliers.
Considering that the wholesale business is centred on moving high volumes, stockouts will lead to reduced volumes sold and revenue.
Rapid expansion
Growth in any business is usually a positive factor, although careful consideration needs to be put on how the growth is being financed.
Usually, a preferable situation would be where the growth is financed by internally generated profits that are invested back into the business, that way of financing growth is the least risky. For capital-heavy expansion, growth could be financed by equity or debt, which requires additional analysis once growth is financed by those two.
For a wholesale FMCG, whose strategy is to sell more volumes with less margins, financing growth by debt could be risky, especially considering the high cost of debt at the moment.
If the growth fails to deliver as expected, the debt repayments can exert so much pressure of cashflows suffocating the operations of business and subsequently leading to insolvency.
A classic example in the public domain of other companies that have fallen into that trap is the TN Company.
Governance structures
The temptation to overlook environmental, social and governance factors that affect the business is usually very high especially when the business is run by the promoters.
Although it is not yet clear how the first two factors affected the business, it is apparent that the lack of proper governance structures and systems around financial discipline contributed to the company’s insolvency, as reported by the CRP's first report.
A competent board of directors with structures like the Audit Committee and Risk Management Committee amongst others help direct the company and give guidance on potentially detrimental endeavours that the company might want to explore.
Considering how unique the Zimbabwean operating environment is, the board will be better off with local practitioners, who have experience in running similar operations in that environment.
Analyst’s comment
The cost of a failed Metro Peech & Browne will be significant to the economy and should be avoided at any cost.
Although individual companies can come up with their own strategies to survive such treacherous waters, it is incumbent upon the government to make sure that the playing field is levelled for retailers and wholesalers to compete with the informal market.
Failure to do so will result in less government revenue through taxes, and the state ends up printing, which then leads to inflation.
Going forward the company might want to analyse its risk appetite and consider if debt is the best way to fund anything for an FMCG.
The fact that buildings and land combined with office equipment contribute over 35% of total assets for an FMCG is worrying in my opinion when the business can be run without tying up resources into land or buildings.
This usually results in the need to borrow and the subsequent effects of that in our current operating environment. Intercompany and other liabilities contribute close to a quarter of the creditors, and the character of the intercompany liability might need to be interrogated to see if there are no fishy transactions behind.
It is good news that there are potential investors who want to take up a stake into the company and help revive
Most of the material used in this article was drawn from the Corporate Rescue Practioner Report to the Master of the High Court by Crowe Charted Accountants.
- Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.
