LEADING dairy manufacturer Dairibord Holdings Limited (DHL) sells the majority of its products through the informal sector in order to raise the much required foreign currency, Standardbusiness heard last week.
The devaluation of the Zimbabwean currency relative to the US dollar put significant pressure on financing and operating costs, according to DHL's trading statement for the first quarter ended March 31, 2023.
The Zimbabwe dollar dropped from $687,28 at the beginning of the period to $929,86 throughout that time, a decline of almost 36%.
Resultantly, this eroded consumer incomes as the local currency depreciation meant goods were now costing more on the official market, leading most to turn to the informal market for value preservation.
“Foreign currency is very much determined by your ‘route to market’. When you go to the general trade market it’s purely a US dollar economy so as you take your products into that US dollar economy it means you are also raising foreign currency,” DHL group chief executive officer Mercy Ndoro told Standardbusiness in an interview.
“So, our route to market architecture is such that we are able to harness and generate the foreign currency that we need to support the business. So, it’s largely about prioritising our products into the foreign currency generating channels. We are getting our foreign currency from the general trade, also known as the informal market. It’s where a lot of that foreign currency is coming from.
“The formal market, that is your modern trade, very few people buy using US dollars. So, for us, 25% of our volumes are going through our general trade, 14% is going through franchises, 11% going through vending and institutions and all those are foreign currency generating channels.”
The sourcing of foreign currency from the informal market is due to the failure of the forex auction in servicing the company’s needs.
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Ndoro stated that in terms of exports, South Africa was proving to be a sizable market because of the huge Zimbabwean diaspora and that sales in Zambia were also increasing, mostly due to its Quick Brew tea product.
These indications, she explained, led the company to decide to concentrate on Mozambique because of the country's significant demand for DHL's milk product, Steri.
Tight monetary control, a lack of foreign currency, a weakening local currency, and regular power outages all made it challenging for DHL to operate during the first quarter.
While the Reserve Bank of Zimbabwe lowered loan rates from 200% to 140% in March 2023, the Zimbabwe dollar inflation soared even higher, hindering DHL's output.
Driving inflation was the near 36% drop in the value of the Zimbabwe dollar.
What is driving sales in the informal market are their smaller dairy products.
To mitigate against the rising cost emanating from the depreciating currency, Ndoro said the company’s expenditure was now being aligned to the money they were receiving.
“When we then look at the other local expenses, the numbers are very fluid, they do change. Also, we deliberately manage them so that we are aligning our expenditure to the colour of the money we are receiving,” she said, during the briefing.
“So, the negotiations and the discussions that we are having also align with what we bring into the colour of the money that we are getting from the market.
“We are looking at growing our volumes and that growth requires a lot of foreign currency for us to be able to stock raw and packaging materials for us to realise it,” Ndoro said.
The DHL chief said they required a lot of working capital in foreign currency.
The depreciation of the Zimbabwe dollar led to a $5,02 billion monetary gain for DHL that helped raise profit after tax to $1,75 billion. This was from a 2021 comparative of $208,37 million.
