• Tea market strengthened and showed resilience.
• The macadamia average selling price declined by 21%.
• Contraction in company revenue of 12%.

Zimbabwe Stock Exchange-listed company Ariston Holdings Limited (ARIS.zw) has seen mixed performance across its business units. Its main product categories are tea and macadamia nuts. The third business unit can be seen as a grouping together of the rest of the company’s product offerings which, as stated in Ariston’s annual report, serves to diversify the business and hedge against the adverse impacts that occur in the main categories. Although it may be the intention of management to use this third category to hedge against downside risks, it may be that other categories are better suited in the current economic environment to protect company value. With that in mind, this article analyses the company’s full-year report that ended September 2022 and aims to access the comparative resilience of the three categories in light of the ensuing global slowdown.

Ariston Holding Limited has six business units in the northern and eastern regions of Zimbabwe. Southdown Estates consists of three tea estates with over 1 200 hectares allocated to tea plants, almost 60 hectares to bananas, and over 450 hectares to macadamia trees. Claremont Estate concentrates on growing pome and stone fruit, passion fruit, and potatoes; while Kent Estate focuses on horticultural crops, poultry, and livestock. The geographic spread of the business units means that they are affected by rainfall patterns differently. This is a strategic feat given that the erratic rainfall patterns that plague Zimbabwe can be better managed with one business unit not necessarily being affected by the same weather conditions as the other. In other words when rainfall is scarce in the northern regions, for example, then it is possible that the eastern regions would still be experiencing rain. Consider potato farming which saw rainfall delays in the December period, consequently resulting in production and revenue shortfalls when compared to the same period a year prior. In that period revenue had to be supplemented from other product categories, such as tea, which were geographically placed in areas with better weather conditions until the spell ended in January 2023. The unpredictability of Zimbabwean weather patterns makes the geographic positioning of the company’s business units a strategy for economic resilience.

The timing of production is an additional strategic feat. The choice of goods produced is key to ensuring all year-round revenues. Considering that the production of macadamia nuts is expected to pick up in March, as stated in the company’s 2023 trading report, the product mix must be such that in the preceding months the other product categories are earning enough to maintain overall profitability. The importance of having supportive product categories is also true during recessionary periods whereby individual product categories that face steeper slumps must be supported by product categories with relatively more resilient demand. Theoretically, the split between deciduous and staple crops (for example, bananas and potatoes, respectively) is an example of such a strategy. This logic follows other economic shocks such as inflation, where by although general prices increase and the public tightens their purses, certain product categories that are relatively more price elastic will be affected worse than those which are price inelastic (for example, potatoes). Ultimately, not all product categories are affected alike. Because economic shocks impact one category more so than another, it is strategic to have a product mix with inverse responses to economic stimuli.

A mix in terms of products produced for domestic consumption and products produced for the export market is an additional strategy to hedge against economic shocks. When domestic fundamentals are unfavorable, companies which enjoy access to export markets may be able to provide comparatively better returns. Consider the current domestic economic environment where the inflation rate is soaring above 200%, meaning that demand is being constrained as the public’s purchasing power is undermined and weakened. Moreover, the currency the formal sector receives compensation in is the local currency (namely ZWL$), which has been continuously depreciating since it was introduced in 2019 and thereby further weakening the public purchasing power. Likewise, demand is further curtailed by the record-high domestic interest rates which contract the growth of the economy through the tightening of business spending. The cumulative result is weakened demand in the domestic market. A company’s ability to trade in international markets where demand may be relatively stronger allows the company to be resilient against a domestic slowdown/recession. Furthermore, with the currency shortages in Zimbabwe and with a significant proportion of costs such as fertilizers and fuel being predominantly purchased in foreign currency, it is beneficial for a company to export and receive foreign currency directly from abroad. This will ensure adequate foreign currency to finance operations without relying on the Reserve Bank Auction Market funds.

A major export product in Ariston’s product mix is macadamia nuts. This has however been the worst-performing category among the above-mentioned. The overall market for macadamia nuts has in the recent past seen low prices, which are expected to recover in 2024 according to the company CEO. The selling prices for macadamia nuts declined due to an increase in volumes available for nut cracking. Owing to lockdowns in China, the Chinese market remained largely unavailable to the rest of the world resulting in an oversupply for the nut cracking market with a decline in average selling prices. Unfortunately, due to the effects described above on the macadamia market size and demand, the average selling price declined by 21% when compared to the prior comparative average price. The weak performance of the macadamia market resulted in a contraction in company revenue of 12% to ZWL 4.1 billion. Moreover, the period in question saw lower macadamia nut yields. Macadamia production volumes declined by 14% when compared to the prior comparative period from 1,292 tons to 1,106 tons. However, there was an overall improvement in quality in line with the company’s strategy to focus on increasing export volumes. As was mentioned above, the company aims to improve quality and benefit from the increased value offered on the export market. Although there seem to be early indications of macadamia production volumes and quality as shown in the 2023 Q1 trading update, the global market for macadamia nuts is expected to remain below its average. Resilience is more likely to be expected in the tea category.

From a relatively higher base, an improvement has been experienced in the average selling prices of both local and export tea and this is expected to continue. Moreover, the automation processes that were implemented during the 2022 financial year are expected to continue yielding improved quality for both tea and macadamia nuts. This will allow the company to exploit more of the gains expected in the market for tea.