eBusiness Weekly
There has been concern in Zimbabwe that monopolies, near monopolies and market dominance can lead to price distortions or at least the setting of prices that can ensure comfortable profits despite bloated costs or managerial inefficiencies, hence the unleashing of those responsible for ensuring a competitive environment.
In some cases, inefficient monopolies do attract competition. Gaps appear where a newcomer with better cost control and marketing can climb in. A lot depends on just how inefficient a monopoly or dominant market player is, the size of the market, brand loyalty and brand familiarisation, the entry capital costs for a new investor and the level of marketing required to make an impact.
In a small economy like Zimbabwe’s, these can be very hard to overcome. In the past, the lack of new investors has possibly been the most critical deficiency, although this is changing in some areas with the Government’s pro-investor policies already bearing some fruit — think cooking oil and margarine, think soft drinks — and in the end will probably be decisive.
The concentration of assets and control within the Zimbabwean economy is at a very high level if the figures from the Zimbabwe Stock Exchange are a true reflection of a major slice of the economy with the top five of the 56 counters having 44 percent of the market valuation and the top 10 almost two thirds. And this gives a sample that can show the scale of the concentration.
To put that into people, assuming an average of eight directors in each ZSE company, you have 80 directors controlling two thirds of that part of the economy under the aegis of the ZSE. It is possibly worse, since some people are directors of more than one major company and in any case, there are at least two pairs of companies in the top 10 that are closely associated or share major shareholders.
Econet Wireless and Cassava Smartech are separate companies, reporting separately since their split. But they still share many shareholders, in fact had identical shareholders at the instant of the split, and the business relationship must be close since a large chunk of Cassava business is done on Econet platforms.
It is interesting to note that their combined valuation, at just over $70 billion, would place them easily at number one if they were still in the same bed, well above present number one, Delta, on just over $57 billion. But the two companies are still number three and number five on the ZSE market valuation list.
The other close pair in the top 10 are Innscor, at number four, and National Foods, at number nine. Innscor is in fact the largest shareholder in National Foods and was only stopped from becoming a majority shareholder by competition regulators. But a 37,82 percent shareholder can have a major say in the appointment of a board of directors, especially when there are other major shareholders who have a slice of each company.
There are, of course, tens of thousands of companies in Zimbabwe, but only a small percentage of the private firms rank with even the smaller ZSE companies and it would be interesting to know just how many small and medium enterprises you would need to produce a total market value equal to Delta’s $57 billion or Innscor’s $34 billion.
Looking at the top 10, two are banks, CBZ and FBC. While they are the biggest banks, the rest of the listed and unlisted between them probably outrank the two in combination. BAT, at number 10, is a merger of the old duopoly that used to own Zimbabwe’s smokers. New entrants have made a splash and those competing on price now have growing market shares, in fact sufficiently large that their products are sometimes in short supply.
Hippo at number six and OK Zimbabwe at number seven are both very big, but do not own their markets. They have major competitors, especially OK, and need to think about these. Both are potentially vulnerable to new entrants into their businesses. OK and the other chains may have driven out most of the old independents who used to control the supermarket sector, but who says that can last forever.
That leaves the other five, or the other three once you look at relationships and shareholdings.
Econet and Cassava have competition. But they dominate the mobile phone market and people talk about EcoCash rather than mobile transactions in general. That dominance has been built by outperforming the competition rather than underhand dealings or anything dubious. The two competitors were undercapitalised at the beginning, NetOne starved of start-up capital and the shareholders of Telecel preferring to haver a smaller slice of the pie.
The growth of Econet came from investment. Strive Masiyiwa was not afraid in the early days, of going public and bringing in a lot of other investors, and then following a management policy of high levels of reinvestment and innovative strategies to increase the number of users into the millions. It is a fact in the phone business that the rewards go to the biggest, since you need the same network for two subscribers as you need for 10 million, except the network with 10 million has the cash flows. But, competition is there. It just needs to get better,
Delta effectively has a monopoly in its primary businesses, but inherited this from the South African market. This is not legislated, new entrants are not banned, but no one is even thinking about trying at this time or place to take on Delta.
The company started with a decision by Charles Glass of Castle Breweries in Cape Town, faced by a long railway line with high charges and derailments and the like that could smash bottles, to supply thirsty colonials with beer brewed in Harare. Mergers and buyouts in South Africa were reflected in Zimbabwe. There was no one else ready, or even available, to move north.
Innscor and its smaller cousin of National Foods are a more interesting company. Zinona Koudounaris and Michael Fowler started with a fast food outlet in 1987, the first step to empire. They had studied the market and how similar chains worked elsewhere. The two were relentless on reinvestment and built a very large and dominant chain in fast food. But independent could, and still do, compete. The start-up investment for a single fast food outlet is not an impossible barrier to entry.
But the huge cash flows from the fast food chain, plus knowledge of potential companies whose owners wanted or needed to bail out, meant Innscor could snap up other bits and pieces, apply better management and, critically, sort out some of the underinvestment problems. The major meltdown in some areas during hyperinflation opened more opportunities that were grabbed and more capital was raised by going public, investors attracted by track record.
Eventually, Innscor started consolidating its bits and pieces into what eventually was split into four companies. The grab bag built around crocodile farms, but including other export-orientated businesses was hived off. The retail business in furniture and appliances was split off. Then the fast foods went as a self-sustaining company, leaving Innscor with a spread of investments ranging from 32 percent to 100 percent in what it calls light industry, but is centred on agro-processing and consumer food brands.
A lot came from acquisition, but to give Innscor credit it was not buying to asset strip or kill competition. Troubled businesses and atrociously managed businesses were bought, consolidated into the group and there was massive expansion and reinvestment. But the result was to make Innscor dominant in food processing.
Interestingly though, that same dominance appears to have opened doors to newcomers. In one major case, a need for further investment allowed Innscor to start buying into one competitor and grow its stake, but others have managed to build their growing businesses outside the Innscor orbit and the company now faces inherited or new competition in each sector, although no one else has the integrated food processing empire and Innscor is still possibly relying to some extent on brand loyalty. It owns a lot of brands, some almost generic names.
These three cases, almost accidental monopolies or market dominators, show the problems facing competition regulators. They won by investment, fanatical reinvestment, very good management and marketing, rather than knifing anyone in the back. Their employment rolls are huge. Breaking them up is not an option, except perhaps by splitting with the same shareholders which does not change much.
But once you reach that level, you have to accept that you will be watched far more closely by regulators and that there will be determined efforts, as the Zimbabwean economy grows and develops, to encourage other investors to provide the more normal competitive environment, the capitalist solution if you like. The final solution is to have the giants more than OK Zimbabwe, very big, but having to watch its back and both flanks. Competitors need to note that investment and management at high levels will be required.
