• The company lost 5% in local sugar sales
• This was due to the free duty imposed by the government in 2022
• However, the company remained profitability

Harare- Local Sugar producer, Hippo Valley Estates has experienced a drop in local sales following the government's suspension of duty on sugar imports according to the Company’s financial results for the full year ended 31 March 2023 affecting revenue and profitability efficacy. Although the policy hurt local producers, high-priced local sugar was also going to affect the consumer purchasing power resulting in low sales. 

In a statement accompanying the financials, the Company’s chairperson Canaan Dube said the sugar industry estimated the total impact of these imports to have been 5% of the annual local sugar sales volume.

 “Local market share was compromised as a total of seventeen (17) brands were imported into the country during the Statutory Instrument 98's six-month tenure which ended in November 2022,” said Dube in a statement. 

“The sugar industry estimated the total impact of these imports to have been 5% of the annual local sugar sales volume.”

As Zimbabwe’s currency continued a rat and a-cat chase in the second half of 2022, the government opened up borders for basic commodities, free from paying tax and duty. Due to the rapid depreciation of the local currency, suppliers and retailers spiked their sugar prices in Zimbabwe dollars, mostly quoting the parallel market rate which enjoyed a premium of over 50% as the government overvalued the local currency on the formal market. In May 2022 alone, the Zimbabwe dollar recorded its worst weekly decline since the reintroduction in 2019 of 33% causing a rage in pricing mechanisms. 

The suspension of duty on sugar imports in Zimbabwe in 2022 was aimed at increasing the availability of affordable sugar in the country. But the policy change was a double-edged sword as it led to cheap prices, which was the intended goal but also led to an influx of foreign sugar brands into the local market, compromising the market share of local producers. 

According to Dube, in just six months, 17 (seventeen) foreign brands were imported into the country affecting the annual sales volume of locally produced sugar. Imported sugar often came from countries with lower production costs and government subsidies, giving them an unfair price advantage over locally produced sugar in Zimbabwe, where production costs are relatively higher. These countries include Zimbabwe’s biggest trading partner South Africa where a bigger chunk of sugar came from, Tanzania, Kenya and Swaziland. 

A stronger Rand in 2022 with a sugar subsidy meant low production costs for South African farmers. The blessing was further strengthened by a duty-free incentive from the Zimbabwean government. This put local producers at a disadvantage, making it difficult for them to compete with cheaper imported sugar.

In addition, some of the imported sugar did not comply with local Labelling and Vitamin A fortification regulations. Compliance with these regulations would have formed part of the costs of locally produced sugar, further putting local producers at a disadvantage. However, a keynote impact of this non-compliance also raises concerns about the safety and quality of the imported sugar, potentially putting local consumers at risk.

This duty-free impasse meant also Hippo Valley had to implement cost-cutting measures and invested in marketing campaigns to promote its products and differentiate them from imported sugar brands. The company has also sought to develop new sugar products that appeal to local consumers and meet regulatory requirements.

As a result, for the year ended 31 March 2023, the Company's share of total industry sugar sales volume dwindled to 381 820 tons from 394 000 tons constituting 52.25% in market share from 53.2%. Total industry sugar sales volume into the domestic market for the year, at 338 059 tons was 5% lower from 356 253 tons as a result of competition from low-cost imports. Industry export sales, however, increased by 15% to 43 760 tons from 38 000 tons following an improvement of export volumes to the USA to 17 751 tons in 2023 compared to 13 087 tons in 2022.

Sugar production was also compounded by other local factors such as load-shedding, a deficit in foreign currency supply and the impact of the Ukraine/Russia war which resulted in significant increases in respect of key agricultural input costs such as fuel and fertilisers.   

All the factors played a critical role in eroding the profit margins as the company failed to fully recover higher production costs in its pricing structure to balance affordability for consumers whilst also having to contend with competitive pressures from sugar imports in the six months to November 2022. Due to a decrease of 2% in EBITDA to ZWL10.4 billion from ZWL10.6 billion, profit margins which are measured using adjusted EBITDA (to exclude any distortions from non-cash changes in the value of biological assets) declined from 10.4% in the prior year to 7.5% in 2023. Ultimately, the increase in price realisations achieved was not sufficient to offset these inflationary pressures on costs.

However, despite the challenges posed by the duty suspension, erratic power supplies and foreign currency deficit, Hippo Valley remained committed to its long-term growth and sustainability. The company remained profitable during the year with the inflation-adjusted revenue spiking by 37% to ZWL1339.3 billion from ZWL101.9 billion in full-year 2022 on the back of price adjustments in response to increasing cost pressures. Operating profit and profit for the year grew by 22% to ZWL25.9 billion from ZWL21.2 billion and by 24% to ZWL17.2 billion from ZWL13.9 billion respectively, with the majority of the growth attributable to changes in the value of biological assets. 

Net cash outflow from operating activities was ZWL3.4 billion marginally ahead of ZWL3.3 billion on account of decreased EBITDA and increased working capital requirements. A total amount of ZWL3.4 billion was spent on capital expenditure from ZWL2.9 billion out of which ZWL1.8 billion was for root replanting. 

As of 31 March 2023, the Company had a net borrowing position of ZWL4.4 billion compared to a net borrowing of ZWL1.1 billion in the prior year, with more cash being consumed due to increased level of investing activities and foreign currency translation dynamics. 

The Board declared and paid an interim dividend of USO.3 cents per share during the year ended 31 March 2023. In light of the heightened volatilities currently weighing down the economic and operating environments as well as the increased level of borrowings, the Directors have not declared a final dividend for the year ended 31 March 2023.

Therefore, the government's suspension of duty on sugar imports has had significant consequences for Hippo Valley Sugar Company, causing a decline in local sales and revenue. However, the company's proactive measures and commitment to long-term growth suggest that it is well-positioned to weather the current challenges and continues to emerge stronger in the future.

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