• Meikles experienced a decline in profitability during the half-year period ended 31 August 2023, with a 30% decrease in profit after tax to ZWL 9.6 billion
• The decline was largely attributed to exchange losses amounting to ZWL 10.4 billion
• It was further compounded by depressed sales volumes at its flagship stores with a 10% decline in units sold and a 20% reduction in revenue from foreign currency sales

Harare- Meikles Limited, a prominent diversified retailer in Zimbabwe with interests in both the retail and hospitality sectors, experienced a significant decline in profitability during the half-year period ended 31 August 2023. The decline amounted to 30%, to ZWL 9.6 billion in profit after tax. This decline was largely attributed to exchange losses amounting to ZWL 10.4 billion, primarily arising from the revaluation of lease liabilities for seven leases denominated in US dollars. This alone presents how the currency conundrum is affecting companies in Zimbabwe. The overall exchange losses during this period totaled ZWL 15.6 billion based on historical cost, or ZWL 17.0 billion based on the spot exchange rate on 31 August 2023.

The decrease in profit however can be primarily traced back to the depressed sales volumes at its flagship stores, Pick n Pay, attributed to prevailing depressed consumer demand. During the period in question, there was a notable 10% decline in units sold at TM Pick n Pay stores, accompanied by a significant 20% reduction in revenue from foreign currency sales. This decline in both sales volumes and foreign currency revenue serves as evidence of the challenges currently faced by veteran retailers in the country. The decline is due to intense competition from the informal sector and the government's control over the currency market, which together create headwinds for the retail industry.

Meikles is listed on the Zimbabwe Stock Exchange and London Stock Exchange. Its roots are traced back to 1892 when Thomas Meikle opened trading port in Masvingo. In 1915, the hotel business was founded while TM supermarkets established in 1978. The group encompasses 4 sectors, Retail (TM Supermarkets trading as TM Pick n Pay), Hospitality (The Victoria Falls Hotel Operated in partnership with African Sun Limited), Real Estate and Property (Thomas Meikle Properties), and Security Services (Meikles Guard Services). Meikles owns 51% of TM Supermarkets (Private) Limited and the remaining 49% is owned by Pick n Pay South Africa. TM Supermarkets is a chain of fifty-nine (59) stores across Zimbabwe of which thirty-one (31) are branded and trade as “TM” while twenty-eight (28) stores are branded and trade as “Pick n Pay”. The Group leases and operates The Victoria Falls Hotel through a joint venture arrangement with African Sun Limited. The Victoria Falls Hotel was built in 1904 and is a 5-star hotel situated in a prime location overlooking the Victoria Falls in Zimbabwe, and has 149 guest rooms. The hotel completed the refurbishment of 47 rooms, bringing them to international standards.

Large-scale retailers are encountering significant difficulties as they contend with fierce competition from the informal sector, a challenge they find difficult to overcome in the midst of the prevailing currency crisis. The Zimbabwean dollar has been substituted by the US dollar as the preferred currency due to its stability. However, due to the requirement for retailers to align their prices with the overvalued interbank rate, their prices become comparatively higher when expressed in US dollars. As a result, they face competition from informal sectors that offer products based on the parallel market rate, enabling them to provide goods at lower and more affordable prices in US dollar terms.

The most recent Q2 GDP estimate demonstrates that the retail and wholesale sector has taken the lead, as illustrated in the graph below. This reflects the sector's importance to the country's economic strength.

The services sector, led by retail and trade, contributes over 50% to Zimbabwe's gross domestic product (GDP), making it the largest sector surpassing agriculture, manufacturing, and mining. In the second quarter of 2023, retail and trade accounted for 18.6% of the GDP, which was the largest contribution followed by mining and quarrying.

In this scenario, the currency predicament is causing a decline in both sales volumes and revenue when measured in US dollars. Simultaneously, revenue growth in Zimbabwean dollar terms is hampered by rapid devaluation, resulting in exchange losses. As a result, large-scale retailers find themselves in a precarious position, navigating through challenging circumstances.

One of the primary issues is the government's manipulation of the Zimbabwean dollar in relation to the US dollar. The government's claims of a liberalized exchange market are not only unrealistic but also lacking a solid foundation. This becomes evident when comparing the government's exchange rate with the parallel market rate. If the formal market rate, particularly, is truly liberalized, it should align with the black market rate, which is determined by the economic dynamics of supply and demand.

However, presently, there is a significant disparity of over 50% between the black market and formal market rates, indicating clear signs of market manipulation. Within the interbank rate of willing buyers and sellers, the Zimbabwean dollar is trading at ZWL5.7 thousand against the dollar, whereas the peer-to-peer rate has surged to ZWL9000. The situation worsens when considering the black market rate, which reaches ZWL9500. Moreover, informal shops that accept the Zimbabwean dollar as a form of payment are charging a minimum of ZWL10000 per dollar. This substantial premium of 67% makes it extremely challenging for large-scale retailers to compete with the unregulated informal sector.

The government's policies are placing a heavy burden on large-scale retailers, despite their significant contributions to the national treasury through tax payments, unlike informal players. Both largest retailers, OK Zimbabwe and Meikles, are experiencing the negative impact. In addition to currency manipulation, one of the ways the government is affecting them is by providing duty-free products on imports, even though border control is already compromised due to corruption. The graph below illustrates how the Zimbabwean dollar has impacted the operations of these two leading retailers compared to the dollarisation period.

The pricing discrepancy between formal retailers and non-formal players creates a scenario where the products of formal retailers become comparatively more expensive. Non-formal players, who often evade tax payments and regulatory requirements, can operate with lower costs. This imbalance in cost structures places formal retailers at a disadvantage, leading to heightened competition and potentially even forcing them out of the market.

Due to a controlled exchange rate combined with the rapid devaluation of the local currency, retailers in Zimbabwe have struggled to achieve convincing profitability when measured in Zimbabwean dollar terms, especially when compared to US dollar terms.

In July this year, the government implemented a policy allowing duty-free imports of 13 essential products, such as sugar, rice, cooking oil, washing powder, and flour. This exemption from import duties has resulted in increased competition for supermarkets. With the availability of duty-free imports, the informal sector, despite evading taxes such as corporate taxes, rentals, and high employee expenses, no longer needs to resort to smuggling or bribery. This grants them a significant competitive advantage. As a result, large-scale retailers find themselves in a precarious state, facing heightened challenges in the market.

To compound the challenges faced by large-scale retailers, the government has also permitted the duty-free shipment of maize and wheat. This development adds to the headaches of these operators, as mealie-meal (maize meal) serves as a staple food in Zimbabwe, along with rice and bread, constituting significant portions of retail sales. The insatiable competition has already led to the closure of Metro Peech and Brown, the largest wholesalers, while OK Zimbabwe's sales have plummeted below the break-even point.

It is crucial for the government to implement pragmatic policies that strike a balance between supporting tax-paying companies and ensuring the welfare of citizens. Companies like OK Zimbabwe and Meikles despite contributing to the national fiscus employ a significant number of people. When faced with challenging economic conditions, they may be forced to close shops, downsize their workforce, and limit hiring, exacerbating Zimbabwe's already high unemployment rate. According to ZIMSTAT, the official unemployment rate stands at 54%, while non-governmental sources suggest it may exceed 90%. The graph below illustrates the substantial contribution of large-scale retailers to the national treasury through tax expenses during the dollarisation period.

The graph below shows large scale retailers’ contribution to the national fiscus through taxes in ZWL

However, Meikles has an advantage due to its diversified presence in the hospitality and property markets segments. However, the retail sector still accounts for 80% of its total revenue, indicating its heavy reliance on retail operations. On the other hand, OK Zimbabwe is attempting to tackle competition through acquisitions, such as the recent acquisition of Food Lovers. Despite these strategic moves, it seems that more action is needed to effectively address the intense competition in the market. Simply acquiring other businesses, especially formal retailers facing the same challenges as itself may not be sufficient to overcome the challenges at hand.

Given the current circumstances and challenges faced by large-scale retailers, it could be beneficial for them to explore diversification into sectors such as mining and property. Diversifying their revenue streams can help mitigate risks associated with the retail sector and potentially increase their overall revenue. The mining sector, in particular, can offer opportunities for growth and profitability, considering Zimbabwe's mineral-rich resources. Similarly, investing in the property sector could provide additional sources of income and potentially long-term stability.

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