eBusiness Weekly
Over the next year Zimbabwean businesses and producers are going to have to think a great deal more seriously about pricing and pricing models and take their customers, especially the final consumers, far more into their confidence.
A major problem coming as the global Covid-19 pandemic recedes as vaccination rates build up around the world is a degree of inflation in several areas, and we are talking about US dollar inflation not local currency. This will have an impact on the cost of imports into Zimbabwe, an impact that has nothing to do with exchange rates or any local costs.
Already we are seeing fuel prices rise, a rise that is caused directly and purely by the fact that world petroleum demand is rising and oil producers are climbing out of the hole they were in as Covid-19 struck and dramatically reduced travel around the world and so reduced the demand for oil. While producers cut output in an effort to stabilise prices, they still needed cashflows and so had to accept a falling price.
Now that demand is rising again oil producers are moderating their production increases to start pushing up prices to something closer to the levels before Covid-19. They possibly will not be able to go all the way in the short term, but they are going to try. For Zimbabweans this is something new.
During the oil price falls the last reforms were implemented with the total end of actual and implied subsidies being dumped and the new exchange rate system coming into effect. So fuel prices are now based on cost recovery; the only help is that the main duty is volume-based, rather than price-based, and quite a lot of other charges in the refining and transport chain are also volume-based, although special Covid-era deals and price bargains are less likely.
The net effect is a price rise, but at a lower percentage than the price rise in crude oil. Fortunately, maximum petrol and diesel prices in Zimbabwe are regulated. The regulator, Zera, uses a straight formula that starts with the landed cost, at Feruka, of the refined fuels. It then adds in the local costs and applies agreed margins and comes up with the final maximum price. This eliminates any attempt by oil importers to push prices up, or re-establish the black market to do this, by reducing quantities. They have to keep sales volumes up to make profits that cover overheads.
The petroleum industry in Zimbabwe, incidentally, shows the easiest way to kill a black market and bring in price competition. The reforms, especially the advent of direct imports, ended shortages and we do see some retailers cutting prices to compete for volumes in what is generally regarded as an overtraded sector. Unit margins might be guaranteed, but volumes are required to cover overheads.
But we now also see some producers taking advantage of these fuel price rises. The major bakers, who have an open deal between themselves not to compete on price, have already said that rising fuel costs are a major factor in their recent 6 percent rise in bread prices. Since fuel is, even in a business that requires daily distribution of product using heavy trucks, nowhere near the largest component in the costs, that percentage rise may well be hiding other reasons for the price rise.
In any case the sector is odd, baking their loaves in Marondera and Harare for national distribution by truck. This could well open opportunities for more bakers in other cities or force the three majors to decentralise production. But at present consumers in Harare and Marondera are in effect subsidising consumers in Victoria Falls.
Other raw materials may also rise in price. And this is what we are talking about when we note that producers are going to have to come a lot cleaner with their customers and avoid temptations to be vague. If, for example, a particular input that forms 20 percent of the final value rises in price 10 percent, we should expect a 2 percent price rise. If it is more, then someone needs to explain because the assumption will be a bit of profiteering. Consumers tend to assume this is the case and so need to be convinced if it is otherwise.
The other problem in what is still a small national market is the dominance of monopolies, near monopolies and cartels. This allows price fixing. This might, if everyone is honest, to be just cost-recovery with a modest margin, but that still means the incentives to control costs are sharply reduced and mismanagement, bad management and sheer inefficiencies are catered for. In a truly competitive environment there are a lot of incentives to be the producer who best manages costs, who gets maximum productivity out of equipment and employees, and who manages their business extremely well and can cut margins. Generally, the higher volumes result in better profits.
Our big three bakers are a supreme example of what would be banned in many jurisdictions and be a criminal offence in some. They even issue joint statements on their agreed prices; it is not something done in secret. Three CEOs, probably accompanied by CFOs, meet either in person or virtually and come up with a number, presumably one that at least covers the costs of the least profitable, and then decree that number as the new price for a loaf.
Yet the three brands have taste differences, where they do compete on consumer preference, possibly different recipes and definitely have different transport and production costs. At least one has corporate links to a major miller and supplier of wheat flour and while there might be a “Chinese Wall” between the two concerns, since they have different minority shareholders, there must be temptation and in any case the conglomerate, like all conglomerates, likes to discuss corporate efficiencies from shared services.
Besides these factors, we also have some businesses who buy inputs using foreign currency obtained on the auctions, but price using the black-market exchange rate, and especially the black-market rate for what dealers sell currency at, which considering the huge gap between buy and sell rates, is very high.
The Government, wisely and correctly, has eschewed price controls and subsidies. Both distort markets, lead to shortages and open up black markets, as does rationing foreign currency by Reserve Bank of Zimbabwe fiat. So stuff appears on the shelves in quantity, there is now some price competition in many lines, and the main distortion comes from smugglers, who avoid duties and the VAT, and who charge in foreign currency avoiding any complications over rates.
But the Government and Reserve Bank reforms, and their switch to embracing an open market economy, now must be matched by the private sector in total. Since we had a distorted and controlled economy for more than half a century since UDI this is something new for all business managers, but most learned the theory at university.
It will require more intervention from the Ministry of Industry and Commerce, or to be more precise from the independent bodies that come under the ministry’s oversight and which are largely funded out of the ministry’s budget allocations. We have a Competition Act and the new Consumer Protection Act with the accompanying Competition and Tariffs Commission and the just appointed Consumer Commission.
The main function of both bodies, in the new world where the Government embraces open markets, is to ensure the private sector, which for practical purposes includes State-owned enterprises, also embraces open markets. In other words, the State has moved from controller to referee.
And as anyone who follows sport knows, referees need to know the rules better than anyone else and need a stock of yellow and red cards. The Reserve Bank has already switched to this system in the currency auctions, handing out a small number of red cards and a far larger number of “watch-it” yellow cards. In the petroleum industry Zera has the authority to hand out the cards, and has encouraged the linesmen, who happen to be the consumers, to raise the flag when they see a potential infringement.
The new economic dispensation now requires the bodies under the oversight of the Industry and Commerce Ministry to be properly funded and adequately staffed by really good referees. Assuming everyone in business is destined for sainthood in this world and the next and that market forces can operate without any regulators, or referees, is not a good idea.
If those exemplars of free-market capitalist economies, the European Union and the USA, require watchdogs to make sure the free-market is in fact free, then to be sure Zimbabwe does as well, especially when in a small economy it is so much easier to cheat. Referees do not play the game, despite what some disgruntled fans may think, but they ensure the game is played fairly. No one wants a return to Government control, and players who do not break the rules actually welcome the referee’s whistle to stop others from doing so.
This is why budget and effort once spent on market control now needs to be switched to the bodies who can ensure that markets do work as intended, as the best method to ensure growing economies, adequate supplies, and through real competition the best value for consumers with the cheats, both those who manipulate the systems and those who cheat consumers, sent off.
