• British American Tobacco (BAT), the leading cigarette maker in terms of market share, has faced significant challenges due to the Zim dollar crisis, including liquidity constraints and the rapid depreciation of the Zim dollar. As a result, the Group has reported a record loss, not only since the reintroduction of the Zim dollar in 2019 but also since the adoption of the US dollar in 2009.

Harare- Cigarette maker and distributor, British-American Tobacco (BAT), has reported a half-year loss for the period ended 30 June 2023. This loss is particularly significant as it has doubled from the previous half-year’s ZWL3 billion, reaching a staggering 6 billion.  British-American Tobacco holds a dominant market share in Zimbabwe, accounting for approximately 80% of the tobacco manufacturing industry, down from 86% in 2017. The company boasts a diverse portfolio of tobacco brands, including Benson & Hedges, Dunhill, and Rothmans. Established in 1960, the company became listed on the Zimbabwe Stock Exchange in 1961. Since the dollarisation in 2009, the company had been making profits, taking advantage of a higher market share and competitive brand despite aspects of smuggling of cheap substandard cigarette brands.

During the hyperinflation period in 2009, when the US dollar was reintroduced, the company achieved a profit of US$172,000. The subsequent year saw a slight decrease, with profits marginally dropping to US$162,000. However, in 2012, there was a significant surge in profitability, as the company's profits increased from US$1.2 million in 2011 to an impressive US$5 million. This remarkable growth represented a staggering 3000% increase in profits within a span of four years.

Profitability during dollarisation in US$ millions

However, the company faced significant challenges following the controversial 2013 elections, which declared former president Robert Mugabe as the winner. This shows how disputed elections in Zimbabwe plays a significant role in affecting business confidence. Also, during this period, the implementation of stringent taxation policies on cigarettes had a detrimental impact on the company's financial performance, resulting in a loss of US$1 million. However, the company swiftly recovered from this setback, experiencing a remarkable rebound in profitability. In 2014, the company generated a profit of US$5 million, showcasing its resilience and ability to adapt to changing circumstances.

The introduction of Bond Notes and Coins had a significant impact on the profitability of the company. Initially, the market reaction was negative due to uncertainties surrounding these new forms of currency. However, as the continued use of US dollars persisted, the company was able to adapt and mitigate some of the challenges.

In 2015, the company achieved a record profit of US$7 million. However, the following year, during the first half of 2016, the profitability chart took a downturn, with profits decreasing to US$3 million. The currency distortions, which pegged the USD equivalent to Bond Notes, created scepticism in the country and resulted in lower demand for cigarettes.

Fortunately, in 2017, the company experienced a marginal increase in profits, reaching US$4 million. This positive trend continued in 2018, as the company's profits jumped to US$7 million.

Profitability after Zim $ introduction from 2019 in ZWL billions

However, in 2019, with the full-scale introduction of Zimbabwe dollars, the company faced a challenging environment characterized by hyperinflation, shortages of basic commodities like fuel and foreign currency, and an excessive liquidity of Zimbabwe dollars in the market. Consequently, the company incurred a significant loss of ZWL18 million, marking the onset of a crisis and a series of challenges.

However, in 2020, the company was able to leverage the COVID-19 pandemic, as people sought comfort in activities such as drinking and smoking while spending more time at home. This led to a rebound in profitability, with the company recording a profit of ZWL73 million. Furthermore, the relegalisation of US dollars in the country proved advantageous for the company. The liquidity injection resulting from this move helped to stimulate operations, contributing to the company's overall success.

Building on this momentum, in 2021, the company's profit rose significantly to ZWL1 billion. This marked a substantial recovery from the previous year and showcased the company's ability to adapt to changing circumstances and capitalise on emerging opportunities, despite the ongoing challenges in the market.

However, in 2022, as businesses resumed operations, the country experienced challenges such as massive electricity power supply disruptions and a significant liquidity injection of the Zimbabwe dollar. This resulted in a mismatch between the supply of US dollars, which is crucial for financing company operations, and the liquidity of the Zimbabwe dollar. These circumstances had a severe impact on the company's financial performance. In the half-year period, the company recorded a substantial loss of ZWL3 billion, marking the highest loss on record since 2009 when the Zimbabwe dollar was abandoned, and its subsequent re-adoption in 2019.

However, the latest half-year performance for 2023 revealed a further deterioration in the company's financial situation. The losses incurred during this period doubled from ZWL3 billion in 2022 to an alarming ZWL6 billion. The company faced significant challenges, particularly in relation to exchange losses, which skyrocketed to US$20.1 billion, representing a staggering increase of 497%.

These exchange losses were incurred despite the company generating a revenue of ZWL71 billion. The unfavourable exchange rate fluctuations and the resulting impact on the company's financial position proved to be major obstacles during this period. Despite the substantial revenue generated, the company's significant losses highlight the gravity of the challenges it faced and the strain on its overall financial performance.

The company's cigarette sales volumes were significantly impacted by the rapid depreciation of the local currency. Additionally, the scarcity of the currency, coupled with the implementation of the 150% bank policy rates, exacerbated the challenges faced by the company. As a result, cigarette sales volumes decreased by 15% during the period. The Zimbabwe dollar experienced a weekly decline of 33%, coming closer to reaching a record high of 35% in May 2022. This depreciation of the currency further contributed to the difficulties faced by the company and added to the volatility and uncertainty in the market.

The company's profitability challenges were further amplified by increased competition from other cigarette producers, particularly in the form of smuggled cigarettes that were both substandard and offered at lower prices. The Beitbridge border post remains the significant entry point for smuggled cigarettes, accounting for approximately 80% of the illicit trade. By 2017, the company faced competition from main competitors such as Savanna Tobacco and Gold Leaf. However, new brands like Rudland and George emerged, intensifying the competitive landscape within the market.

Adding to the company's financial burden was the government's tax regime. In historical terms, the company paid a substantial amount of ZWL14 billion in excise duty, corporate tax, pay-as-you-earn (PAYE) tax, custom duty, and withholding tax. The dominance in the tobacco market, coupled with the high excise tax imposed on cigarettes, positions the company as one of the largest contributors to the country's fiscus among tobacco companies.

Taxes accounted for nearly a quarter of the generated revenue of ZWL71 billion, highlighting the significant contribution made by the company to the government's revenue through tax payments. The combination of intense competition and the high tax burden further strained the company's profitability during the period.

Given the challenges and factors discussed, including increased competition, the influx of smuggled cigarettes, currency depreciation, and the high tax burden, the company has experienced a record loss. The volatility and fragility of the Zimbabwe dollar, coupled with the persisting economic challenges in the country, contribute to the uncertainty surrounding the company's future profitability.

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