Announcements that the packaging industry is increasing prices by 500 percent bring into sharp relief some exceptionally unpleasant aspects of business in Zimbabwe. Topping the list are greed, an inability to do simple arithmetic and the fact that most industries are dominated by three or fewer concerns making combinations not just possible but very easy.
We are told about the problems of foreign currency, and the need for some to switch from forex supplied by the Reserve Bank of Zimbabwe to direct or indirect parallel market forex. We are told about the effects, especially the knock-on effects of the 2c tax. What we are never given by those who raise prices are the financial calculations, based on their real accounts. And the reason for that is not commercial secrecy but an unwillingness to display incompetence or greed.
Looking at the lesser pressure first, the 2c tax. We have heard some people predict this could cause a 30 percent rise in prices. We wonder why they lie. And to show up the lies let us take a real example. Zimpapers is a fairly typical mid-sized ZSE-listed company. In our major operational units about half of all payments are for things like Zimra payments and salaries, which do not attract the tax, and the other half are payments for goods and services which do. So our costs, through the higher bank charges, rise 1 percent. We are not happy about that, but on the other hand it is not going to kill us; and in any case, like many other companies, we have devoted some managerial time and talent in the last few weeks to seeing how we can trim other costs to balance that 1 percent.
But assume a similar company is useless, and cannot find a way round the tax. So it raises its prices 1 percent. And assume it is a primary producer that sells its output to a middle-man who the sells to us. Our costs for goods and services rise 2 percent, 1 percent in each step. That, plus our 1 percent, would mean we could not raise our prices more than 3 percent and even then we would be chancing our arm because as attentive readers have noted only half our costs are outside goods and services, so the maximum we could contemplate is a 2 percent rise and even then that assumes we buy everything from middlemen, which is not the case. And we are a typical final stage producer that sells directly to the public.
The forex problem is worse, far worse, we agree. But it is not 500 percent worse. The most dramatic rises will be in the cost of goods that were bought with allocations from the RBZ and are now bought with parallel market dollars, roughly a 300 percent rise. But unless the supplier is nothing more than an importer shuffling paper there will be some value added in Zimbabwe and overheads of that person adding the value remain the same. So the worse case should perhaps be a doubling in price, and even that needs backing with respectable accounts.
Of course there are those who say they have to charge on likely replacement costs of stock. But the assumption that things will get a lot worse very quickly is not justified by facts. The trade gap, the extra we spend on imports over exports, is narrowing. The fundamental problem, the growth in liquidity and money supply, is being fixed. In August money supply grew a little over 1 percent, a sharp drop, and that was before our new Finance Minister started turning off the taps by raising taxes and cutting Government spending and before the RBZ Governor then started bailing out that pool of excess liquidity, an interesting double act for those who can read statistics. Our economy is not fixed but at least we have stopped it getting worse and we are taking serious steps to make it better.
Packaging shortages and prices have already produced some changes among our more responsible, honest and innovative manufacturers. Some have already simplified packaging; others are proving their honesty by exploiting the mathematical relationship between surface area and volume of a solid to have far smaller percentage increases for a larger pack than a smaller pack.
Delta, one of the most aggressively flexible industrialists, have diverted a lot of output back into the old-fashioned reusable glass bottles and there are strong market rumours that the company would be supportive of anyone wanting to resuscitate Zimbabwe’s glass industry. Since Delta already controls a lot of its inputs by paying Zimbabwean farmers to grow them, we will be interested to see further innovations there.
Anyone thinking that the market will accept anything in the way of price rises needs to spend a few hours in a decent supermarket. Supply chains, that often were a bit tangled last month, are being straightened out and choice is growing again. CEOs who look at how their customers act, rather than trying to gather information at the bar of an up-market golf club, may well be surprised to find that most consumers are not stupid and actually resent being taken for a ride; even when they can afford the higher priced product they might, on principle, buy something else.
Astute researchers will quickly note that brand loyalty is lower and wallet loyalty is higher. In other words where products are roughly equivalent most shoppers buy the cheaper. And there are products that doubled in price and are now hardly moving; we fear, for example, that there is likely to be a lot of time-expired butter and potato crisps fairly soon.
Zimbabweans will remember those who acted honestly when faced with hurdles and those who threw up their arms and decided to charge the maximum and hoped to make money by selling a few high-margin goods to the few rich rather than use realistic margins and maintain or expand market share.
The terrible days of hyper-inflation sent some well-established concerns to the wall, but also grew a crop of innovative newcomers who came to dominate the market. The present, and far more temporary difficulties, open opportunities as well as close doors. The smart guys are the ones who ride the opportunities. The dummies will join the dinosaurs.