- Afdis has maintained a steady growth rate in its volumes despite facing challenges from the smuggling
- Smuggling, which extends beyond alcohol has had significant consequences for Zim’s economy
- Corruption and counterfeit goods is exacerbating the smuggling issue
Harare- African Distillers, a manufacturer of spirits and wines listed on the Zimbabwe dollar denominated exchange ZSE, maintained a steady growth rate of 11% in its volumes after achieving the same growth in the first quarter of June 2023. Despite this positive trend, the company continues to face challenges in combating the smuggling of inexpensive alcohol in the country, which is sold at lower prices.
During the six-month period ended 30 September 2023, the company reported that its Ready to Drink segment experienced challenges due to the influx of low-priced smuggled imports, which also had an impact on wine volumes in the first quarter. This situation highlights the ongoing intense competition faced by the company within the country's heavily informalized economy.
In light of the prevailing economic conditions within the country, the significance of alcohol quality or brand is not particularly prominent. What holds greater importance for individuals with alcohol dependency is the objective of achieving intoxication rather than the specific attributes of the alcohol itself.
During the initial quarter of this year, Afdis experienced a decline in sales volumes within the Wines and Spirits categories. Wine sales decreased by 13% as a result of intense competition from smuggled products, while spirits only saw a sluggish growth of 1%.
In the reviewed half-year period, there was an improvement in wine sales, which grew by 7%, and spirits sales, which increased by 8%. However, Ready to Drink segment shed 12 percentage points from the sales recorded in the first quarter, to an increase of 14%. This decline on a quarterly basis indicates the impact of cheap imports, which have deprived efficacy in sales volumes.
It is worth noting that the Wines category experienced a notable turnaround, transitioning from a decline to an increase in volumes primarily driven by increased market penetration. This indicates that the company successfully expanded its presence and captured a larger share of the wine market during that period after a major blow from smuggled brands in the initial quarter. Spirits benefited from the success of the Whitestone brand. Despite being a premium brand, the company strategically adjusted prices to effectively compete with smuggled products in the market.
Also, despite facing intense competition, the RTD segment managed to achieve growth although this growth rate was lower compared to the initial quarter. It is still noteworthy considering the challenging competitive landscape.
Despite mixed performance on volumes, the company successfully managed to make a transition from negative territory in all categories during the half year.
Meanwhile, the company's earnings witnessed significant growth in inflation-adjusted terms. Revenue surged from ZWL52 billion in the previous half-year to ZWL134 billion this year, while operating profit increased to ZWL28 billion from a previous figure of 6 billion. This substantial improvement resulted in a profit after tax of ZWL22 billion, a significant increase compared to the ZWL2 billion achieved during the same period last year.
However, despite the company's efforts to navigate through challenging circumstances, smuggling continues to be a concerning issue. According to the government sources, smuggling costs the country over US$2 billion annually.
This illicit activity, which extends beyond alcohol to include various goods such as groceries and apparel, has significantly impacted Zimbabwe's formal sector. It has become a major challenge for many companies, leading to some gradually being forced out of business.
Due to intense smuggling of goods leading to higher competition, the corporate rescue process has been initiated for Metro and Peech. OK Zimbabwe's sales, on the other hand, failed to reach a break-even point, suggesting difficulties in generating sufficient revenue. Edgars and Truworths are currently facing struggles as their sales are affected by the presence high competition from the informal sector.
Hippo Valley faced a 5% decrease in sales volumes during the half-year to 2023 due to the smuggling of over 15 brands of cheap sugar.
These examples highlight how a porous border system in Zimbabwe is not only detrimental to formal businesses but also has broader implications for the national fiscus. The influx of cheap smuggled goods is negatively impacting the economy as a whole.
In January of this year, the police intercepted a 30-ton truck in Bulawayo carrying smuggled alcohol valued at 110,000 US Dollars. It is not uncommon for spirits, wines, and whiskies to be priced lower in neighboring countries such as South Africa, Mozambique, and Zambia compared to their prices in Zimbabwe.
This price disparity creates an incentive for smuggling activities, as individuals seek to take advantage of the price differences and import these products illegally into Zimbabwe. Individuals and or companies involved in smuggling operations conceal these goods within transportation trucks, enabling them to evade taxes. The smugglers commonly exploit Forbes Border Post, Sango, Beitbridge and Mount Selinda entry points to illicitly transport beverages and food items.
It is important to note that the vulnerability of these border posts or inadequate security control measures is not the primary factor facilitating smuggling. Instead, various methods are employed to enable the passage of these goods by security personnel in exchange for bribes. This practice serves as a means for security agents to supplement their meagre government salaries.
The prevalence of corruption among government employees,in this case, law enforcement officials like the police and custom officials, has created significant challenges in effectively addressing the issue of smuggling within the country.
However, not all alcoholic products being smuggled into the country are imports. Some of these products are counterfeit items produced within Zimbabwe, specifically in areas like Mbare. These fake products pose additional risks to public health and safety, as they do not meet quality standards or adhere to regulatory guidelines.
The combination of corruption among law enforcement officials and the production of counterfeit goods locally exacerbates the problem of smuggling and underscores the need for comprehensive measures to address these issues effectively.
In order to effectively combat the smuggling of cheap products, it is crucial for the government to prioritize addressing the income levels of civil servants. When government employees, including customs officials and the police, are struggling to meet average living standards, they become susceptible to bribery and corruption.
Even if efforts are made to increase patrols and close customs loopholes, these officials will continue to be vulnerable to illicit offers due to their financial circumstances.
Therefore, the government must first focus on improving the earnings of civil servants to mitigate the incentives for corruption and enhance the effectiveness of anti-smuggling measures.
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