• Meikles saw a 4.8% decline in retail unit sales for the year
  • Uncompetitive US dollar prices led to depressed consumer demand
  • However, it remained profitable at ZWL469 billion

Harare- Food security is a critical component of a stable currency and economy. Everyone in a society must spend money on food, regardless of their income level. In an inflationary environment like Zimbabwe, where a multi-currency system is used with the US dollar dominant, the government has struggled to keep the then Zimbabwean dollar (ZWL) viable before it was eventually replaced by the new Zimbabwe Gold (ZiG).

As a measure to prop up the ZWL in 2023, the government resorted to pegging its exchange rate. The pegged ZWL rate against the US dollar meant that products, particularly food in this case, became inexpensive in ZWL terms but very expensive in US dollar terms. This was problematic since around 80% of the Zimbabwean economy was dollarized at the time.

The policy of pegging ZWL exchange rate had a significant impact on large-scale retailers. These formal retailers continued to use the official, pegged exchange rate, which made their products very expensive in US dollar terms.

In contrast, the informal sector was able to leverage the parallel market exchange rate, which was much higher than the official pegged rate. This allowed informal retailers to offer much lower prices in US dollar terms compared to the large-scale formal retailers.

This pricing disparity gave a distinct competitive advantage to the informal sector. Customers increasingly shifted their buying behavior away from the more expensive formal retailers towards the cheaper informal retailers, as price was a major factor influencing their purchasing decisions.

As a result, Meikles, the second largest retail outlet in Zimbabwe, saw a 4.8% decline in retail unit sales for the year. The uncompetitive US dollar prices at the formal retail stores led to depressed consumer demand as shoppers gravitated towards the informal market with its more favorable pricing.

The authorities' strict control over the exchange rate used by formal retailers, while informal players were able to leverage the parallel market rate, was a key driver behind the shift in consumer behavior and the challenges faced by large-scale retailers like Meikles.

Meikles had to leverage on a recovery in unit sales during the second half. This allowed the company to reduce the full-year sales decline to 4.8%, down from a 10% drop at the half-year mark.

However, the uneven enforcement of the government's in-store exchange rate policy meant that Meikles' revenue received in foreign currency (primarily US dollars) was less than 20% of its total revenue. This fell far short of the broader economic reality, where an estimated 80% of transactions were conducted in US dollars.

Despite these headwinds, Meikles was able to maintain its gross profit margin at 23%, on par with the prior year. This was achieved despite the significant volatility in ZWL prices.

The constant movement in exchange rates did, however, drive up Meikles' operating costs by 110%. Despite these pressures, the company demonstrated resilience under its management team. Profit after tax increased by 259% to ZWL335.6 billion, and the company was able to open two new stores in Gwanda and along Robert Mugabe Road in Harare.

Meikles funded the total capital expenditure for these new stores through its operating cash flows. The company also displayed resilience in managing its working capital, even as supplier trading terms underwent frequent changes.

Overall, Meikles navigated a challenging environment characterized by distortions in the foreign currency market, volatile prices, and rising costs. Through careful management, the company was able to maintain profitability and continue its expansion during this turbulent period.

Group Financial Performance

Despite that, Group revenue grew to ZWL10.4 trillion representing a 102% increase with growth across all the segments. The gross profit margin was maintained at 22.8%, the same as last year, despite the exchange rate-induced volatility in the prices of goods.

However, finance costs increased by 21% to ZWL27.5 billion with IFRS 16 interest charges accounting for ZWL23 billion of the total finance costs. The exchange loss arose primarily from the remeasurement of USD-denominated creditors for the supermarket segment at the exchange rate ruling at year-end. Creditors contributed 94% of the gross exchange loss of ZWL444.3 billion.

As a result, profit after tax increased to ZWL 469.5 billion from ZWL88.6 billion the previous year. The effective tax rate of 45.5% was much higher than the statutory tax rate of 24.7% for the year due mainly to the disallowed intermediated money transfer tax of ZWL114 billion.

At the end of the reporting period, the group had strong liquidity levels, including US$13.8 million in cash. The current assets ratio was 2.31 times, up from 1.74 times the previous year. The debt-to-equity ratio improved to 3% from 9% the previous year. Lease liabilities for the various store leases accounted for 74% of the total liabilities.

Final thoughts

Meikles’ retail performance was satisfactory given it faced an extremely challenging operating environment due to the government's heavy-handed interventions in the currency and price control markets. The artificial pegging of the Zimbabwean dollar exchange rate has made Meikles' products unaffordable for the majority of USD consumers leading to a steady migration of customers towards the informal sector where prices are more competitive. While Meikles has demonstrated resilience through careful operational management and continued investment, the fundamental market distortion created by the government's policies poses an existential threat that the company cannot overcome on its own. Meikles' long-term viability hinges on the Zimbabwean government's willingness to ease currency and price controls, implement a more market-driven exchange rate, and enforce pricing policies evenly across all retail channels. Until then, Meikles must remain laser-focused on cost management, working capital optimization, and strategically passing on increased costs to consumers where possible to weather this perfect storm of economic challenges.

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