• AFDIS faced significant pressure from illicit imports in the wines and spirits market, resulting in a decline in operating income from US$5.1 million to US$1.5 million
• Achieved volume growth of 11% driven by RTD and wine segments, 22%,13% up
• PAT decreased to US$2.5 million from US$4 million due to margin compression

Harare- The issue of smuggling presents a significant challenge to the formal economy in Zimbabwe, undermining local businesses and distorting market dynamics.

Porous borders facilitate the influx of inexpensive goods, including food, clothing, and spirits, which not only create unfair competition but also threaten the sustainability of established companies.

This illicit trade has become a pervasive problem, impacting various sectors, from retail giants struggling to maintain profitability to manufacturers facing diminished market share.

As the informal economy expands, the ramifications of smuggling extend beyond immediate financial losses, jeopardizing the overall health of the national economy and prompting urgent calls for effective regulatory measures and strategic interventions to restore balance and protect local industries.

AFDIS's latest half-year performance to FY2025 reflects these challenges, as the company faced significant pressure from illicit imports within the wines and spirits market.

Operating income plummeted to US$1.5 million, a stark decline from US$5.1 million, primarily due to the necessity of margin compression in response to aggressive pricing strategies aimed at countering illegal competition.

"Revenue grew by 7% to US$26.2 million due to increased volume but operating income was lower than prior year partly due to thinner margins from price reductions meant to counter competition from illegal imports," said the group's chairperson Matlhogonolo Valela in a statement.

"In addition, the differences in approaches used in deriving prior year US$ numbers highlighted above together with the distortions in exchange rates and inflation indices during the same prior period makes comparison difficult," he added.

Compounding this issue are discrepancies in the methodologies used to derive prior year financial figures and distortions in exchange rates and inflation indices, complicating year-on-year comparisons.

Consequently, after-tax profit decreased to US$2.5 million from US$4 million. Despite these adversities, AFDIS maintained profitability, navigating the challenges posed by smuggling and methodological discrepancies in financial reporting.

On a more positive note, AFDIS achieved volume growth of 11% compared to the previous period, largely driven by the Ready to Drink (RTD) and wine segments, which saw increases of 22% and 13%, respectively.

The growth of the RTD category was significantly influenced by strategic promotions and the successful launch of NightSky Gin & Tonic, which received favorable market reception.

The wine segment benefited from improved availability of affordable products and a focused approach to direct sales distribution.

However, the impact of smuggling extends beyond AFDIS, significantly disrupting sectors such as clothing, logistics and retail.

Major retail giants like OK Zimbabwe and Meikles Limited are grappling with unsustainable competition driven by the influx of low-cost goods. In the week leading up to November 2024, Choppies expressed intentions to exit the Zimbabwe market, citing the untenable competition posed by smuggled food items.

In the clothing sector, retailers like Truworths face existential threats, prompting extensive restructuring initiatives.

Although Edgars has managed to sustain its operations by staying attuned to fashion trends, it has faced declining performance since 2023, ultimately suspending local currency credit sales and restructuring its business model.

The reintroduction of Express stores, offering new clothing items priced between US$1 and US$10, reflects a strategic maneuver to compete in a price-sensitive market. 

The logistics sector is similarly affected, with the influx of inexpensive agricultural equipment from China and India further exacerbating competitive pressures on local industries.

Additionally, the sugar industry faces similar pressures and struggles to maintain viability amidst rampant smuggling, underscoring the need for governmental intervention to restore the vitality of the formal sector.

This environment illustrates the pervasive struggle against the informal sector, which continues to undermine established businesses.

 In response to the smuggling crisis, the government has implemented tighter restrictions on the amount of money that can be taken out of Zimbabwe, reducing the limit from US$10,000 to US$2,000.

This measure aims to curtail the outflow of capital that facilitates the importation of smuggled goods.

Given that the informal sector constitutes three-quarters of the economy, addressing these challenges is complex.

Fundamental issues such as corruption, currency instability, and the need to transition from a consumption-based to a production-oriented economy must be prioritized to foster a conducive environment.

The rampant issue of porous borders has facilitated the influx of cheap imports, particularly from Mozambique, South Africa, and Zambia, undermining the competitive landscape for local businesses.

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