Zimbabwe: Dairy Industry Takes a Knock

Zimbabwe’s dairy herd has declined to below 32 000 via a high of 192 000 inside 1990s, Dairibord Zimbabwe CEO Anthony Mandiwanza has revealed.

Mandiwanza (AM) told Alpha Media Holdings chairman Trevor Ncube (TN) on the platform In Conversation with Trevor of which milk production had also gone down to 75 million litres via 260 million during the same time.

He described the business environment in Zimbabwe as tough, following a raft of currency reforms of which have pushed the rate of inflation up. Below is actually the full interview.

TN: Your payoff line is actually “more than just milk” along with yet a lot of people associate Dairibord with milk. Can you unpack what additional lines of products of which Dairibord is actually into?

AM: The genesis of Dairy Marketing Board as a state enterprise was to receive along with process milk via farmers along with produce the traditional milk, pasteurised milk along with butter. of which was the

main line they produced then.

During the transformation via 1991 to 1994, we commenced a process of liberalising the dairy industry along with let the idea play a fuller role than just processing milk. We then decided in

1997 to look outside the box along with to see what additional lines we could produce, exploiting the signage of which existed inside factory through the process line. We came up with three key

pillars of the business: the foods — which produces peanut butter, mayonnaise, along with salad cream to mention a few. The second pillar is actually the beverages: products of which are low milk-based

including lines such as pfuko, cascade as the major lines in of which category. The third pillar is actually of the traditional full milk-based products.

TN: Which line contributes the biggest to your business?

AM: The beverages are by far today the major contributor to our business portfolio.

TN: Looking at your results for the period ended June 30, 2019, how could you characterise of which trading period?

AM: The trading period is actually split into two: January to the end of May, where we experienced both revenue growth along with volume growth along with to a larger extent relatively stable cost line movements.

After May, following the announcement of significant adjustments of which took place, we saw the downturn in terms of volumes along with revenues along with we also experienced significant cost movement relating to the exchange rate along with the scarcity of foreign currency.

The period January to May, we were very confident about the trading along with trending, then via June onwards results represent a much more turbulent situation than was anticipated.

TN: So This particular is actually the negative impact of policy adjustments of which have been made. You have got issues of currency, issues around electricity along with also issues around fuel. Can you give us which one of the issues has had the biggest impact?

AM: In our line of business, we rely so much on electricity along with producing short-shelf life products, which are extremely vulnerable to adjustments inside process line. Any interruption with respect to the supply of electricity results immediately in losses in process, along with to a certain extent, compromising the finished products you want to put into the market. This particular issue is actually very significant in our business.

We also had another challenge of water supply. Traditionally we got our water via the municipalities who failed to deliver with consistency, resulting in us having to buy water for processing. Just to give you a sense of size, inside dairy industry, for milk along with milk products along with additional products, we need a ratio of 2:1. For every litre of which we process, we need two litres of water along with we produced huge volumes in excess of several to six million products per month along with of which then tells you how much water we need. Can you today imagine buying most of the water you need during production instead of getting via the municipality?

TN: Where do you buy the water?

AM: There are quite many independent suppliers of bulk water along with suppliers who buy the idea via Dema along with additional sources. the idea’s not a normal way of doing business, the idea’s absolutely abnormal.

TN: You still have been able to record pretty Great results, which include volume growth, raw milk intake up via 14% last year to 22% This particular year. How have you been able to do so?

AM: An Increase inside intake of the critical raw milk is actually a result of many initiatives put in place to specifically focus on the milk supply development agenda.

We have invested significantly in human resources where we today have in all several of our catchment areas, resident veterinary surgeons working with farmers in of which area to assist in animal husbandry along with animal farming issues to enhance cost, quality along with volume growth.

As a result of those initiatives, we have begun to see an increase in milk supply. This particular is actually a long-term investment, which is actually bearing fruit.

TN: What is actually the status of the dairy herd inside country?

AM: Let us go back to the 90s as our baseline, the country overall, produced 260 million litres of milk via the farmers annually. Today farmers are producing 75 million litres of milk, so you see the change in volumes of milk production via the national herd. The dairy herd was 192 000, nevertheless today is actually just under 32 000 along with those statistics alone can tell you a huge change inside size of the dairy industry via of which period to today.

TN: What could be the strategy to deal with the critical shortage of the dairy herd along with the gap between demand along with supply?

AM: We start via the supply side where the dairy herd can be lifted by looking into greenfield investment.

of which means looking into bigger, high impact low-cost investment.

of which can be achieved through a tripartite arrangement, which is actually government, private funding along with corporate to supply the back-to-back agreement for the offtake of of which initiative. If we do of which, we will be able to produce big dairy producing tenders of which will produce milk much faster within a shorter period of time.

Of course, for the gestation period, we are looking at about several years, nevertheless after of which milk production will increase significantly. Experiences across the Zambian border indicate of which approach to have seen fruits yielding.

TN: What is actually the idea of which you could want to see government doing to attend to the shortage of milk along with the growth of the dairy herd?

AM: On the growth of the dairy herd, government needs to attract private funding. There are many investment approaches by people who are willing to invest directly into the dairy

sector, nevertheless what is actually required is actually the security of of which investment.

If the idea is actually going to be a greenfield investment, there ought to be land available for of which purpose along with we see many catchment areas, one inside Middle Sabi, there is actually potential scope for a big greenfield investment of which can be undertaken.

There is actually an interest via foreign funders to invest in such a project along with of which is actually where government comes on board to provide the comfort of which you need on security needed, corporates to provide the back-to-back support for the milk production in order of which we can process along with market the idea inside domestic along with export market.

Import substitution along with export generation is actually a critical component for of which investment.

There is actually another potential area, which involves private players who are interested in going into a mega project along the same product.

TN: is actually the government on board with This particular initiative?

AM: On the second initiative we were able to break ground with the Lands minister about a month ago. the idea has been encouraging along with we desire to walk on of which path.

TN: could you encourage the youth to get into the market of dairy milk production?

AM: I could caution because there is actually risk of failure. We do not want to encourage a young entrepreneur whose little saving will be devoted to dairy along with might lose out on their investment.

The dairy industry tends to be knowledge along with financial-intensive with long gestation periods — those issues mean of which the return on your investment is actually speaking to three to several years along with young entrepreneurs may not develop the patience to wait of which long.

the idea is actually not to say of which young people should not look at investment opportunities in of which sector, as a company, we are available with our milk development unit to provide young entrepreneurs with the necessary skills along with programmes along with business plans of which can be put in place to make sure projects do not fail when the idea comes to dairy farming.

We have already done some few projects with tiny-scale milk producers, nevertheless the progress is actually rather slow.

TN: How many have you undertaken so far?

AM: Well, currently in terms of our milk supply, 11% of our milk comes via tiny-scale milk producers who benefited via our heifer rehabilitation programme along with of which was successful to a limited extent, notwithstanding the challenges of which I have already alluded to.

TN: Could we have more programmes of which can allow young people to get involved?

AM: What you need is actually an integrated programme of which speaks to starting with the genetics. The genetics must be appropriate.

TN: The results of which we have on Dairibord reflect huge cost pressures on the business. You had an increase in revenue of 139%, nevertheless cost pressure of 123%. You still managed to make a profit of $12 million. Can you say some of those cost pressures eroded your earnings?

AM: These are two jaws. The bottom jaw weighed down the top jaw. The main cost driver is actually the exchange rate depreciation along with you will see of which the company had to pay in excess of $80 million of which relates to the procurement of foreign currency at the depreciation of the exchange rate.

If we had not done of which, we could have done better than at the level at which we recorded at the end of May.

The second one which is actually the cost of disruption, which I have already alluded to, electricity along with water disruptions have been cost drivers; along with, number three, the cost of packing material again relating to foreign currency along with the internal inflation Zimbabwean factor.

Those are the three main key headings, which weighed down our margins.

TN: On the additional hand, you were unable to pass most of the costs to the consumer along with, therefore, depleting your margins.

AM: Yes, ordinarily, in an inflationary environment when you increase prices of products the idea is actually normal. However, what is actually abnormal is actually the level of inflation, which is actually a countrywide problem.

As a company, the idea is actually normal to change prices, nevertheless we could not pass the full inflation on to the consumer mainly because of the erosion of the consumer purchasing power.

As a result, if we had passed the inflation to the consumer we could lose volumes along with when of which happens margins are eroded by the cost push, the result is actually worse than taking smaller along with regular below-inflation cost movements.

TN: You were still able to record an innate profit of $3,8 million compared to $217 000 last year, how did you manage of which?

AM: As a said before, of which the idea is actually the two jaws where the top jaw is actually your revenue moving at 139% along with the cost moving at lower than the movement of your revenue, given of which margin you have just referred to.

Over along with above of which, there is actually need to say of which in an environment in which we are losing value due to depreciating of the currency, how do you preserve your balance sheet along with shareholder value? There is actually need to restructure the balance sheet.

One is actually to invest in your inventory. We did a significant forward investment in January on our inventory, which hedged against cost increases along with we reduced our exposure via foreign currency via $4 million at the end on 2018 to about $1,8 million. We took a decision to source foreign currency, extinguish along with expunge of which foreign debt along with obviously our minds were focused on what is actually the trend of the exchange rate.

As the idea continued to deteriorate if you remain as exposed as we were, the idea could eat big time into your profit along with loss along with into you equity.

TN: I see you have focus on the export market along with the result there has also been quite commendable with 244% growth along with your earnings via the export market to $1,2 million. How did you manage to do of which?

AM: Our biggest revenue driver on the export market is actually our long-life milk, Chimombe, which is actually going into Zambia along with Botswana as our key markets.

Secondly, our sterilised milk finds favour in Mozambique along with Botswana, as well as Zambia.

Thirdly, we have our Quick Brew Tea going into South Africa, Botswana along with Zambia.

Those are some of the key products lines we are exporting.

We also interestingly have foreign buyers who, during the time multi-currency was acceptable, could come to buy in bulk products like maheu to cross over to South Africa along with we saw big volumes moving in of which direction.

TN: Are you formally pursuing of which market?

AM: We are today establishing a much more credible route to market via what we call distributorship along with we have got many initiatives which we are working on in order of which we can

establish a much more permanent presence in those markets.

TN: So with This particular success of which we have seen here inside export market, are there any additional strategies to continue to grow into the region along with perhaps internationally?

AM: Initially in 1997 when we were privatised, we adopted a growth strategy of which looked into Africa along with we invested in Malawi along with Uganda, nevertheless we had to retreat via Uganda because when

we look back we were a little bit clumsy in terms of spreading risk involving the locals along with ourselves. We took a view of which the winner takes the idea all along with the idea did not work.

TN: I see of which you are also disinvesting via Malawi, how far is actually of which process today along with why was the idea done?

AM: At the height of hyperinflation inside country up to 2008, the business unit of which carried us was Dairibord Malawi because the idea was generating foreign currency.

We were able to generate foreign currency into Zimbabwe along with change the idea into the then local currency along with the idea carried the company.

Fast-forward over the past three years, the economy in Malawi has been experiencing foreign currency problems as we are. As a result, we were not able to repatriate foreign currency to Zimbabwe.

Secondly, reciprocally Zimbabwe is actually facing its own peculiar problems — we were not able to support of which investment. As you know when a business carries a subsidiary of which carries a little bit of “fever”, the parent company leverages its balance sheet to support its strategic business unit along with get out of the problems. We needed to recapitalise the business along with of which has been the case since the last three years.

So we decided to cut our losses along with run because we did not see light at the end of the tunnel.

The disinvestment in Malawi was completed end of July.

TN: Will you ever go back to Uganda along with invest inside manner you did before with the lessons of which you have learnt?

AM: I could approach the idea in a different manner. Your route to a market inside region is actually at two levels, physical investment along with brand penetration. I think via a strategic point of view

the idea makes much more sense to invest in your brands along with when they are established you can then see the potential market in order to determine your investment levels.

What we did was a supply side push instead of being led via the demand side.