IT'S THE MARKET FOR VALUE PACKS :
IT IS no secret that consumers are suffering from economic hardships. Government, likewise, has been facing difficulties in financing their expenditures due to declining revenue collections.
Aggregate demand has remained low as the workforce is constantly being rendered jobless as a result of reported company closures. The situation has created one of the worst operating environments for business. Inevitably, as more businesses fold up, purchasing power for the laid off staff is drastically reduced. Repeatedly, more businesses further close shop due to low demand from customers. This vicious cycle will probably continue unless there are macro interventions or businesses adjusting to market trends.
Recently, BAT released their financial results for the full year ended December 2016 results where revenue plunged 25 percent. According to management, consumers have resorted to consuming less because of low disposable incomes caused by the economic challenges.
Further, the market has been infiltrated by illicit traders who are selling cigarettes without paying excise duty. As a result, tax compliant companies have faced unfair competition from such illegal traders, who can afford to sell their cigarettes at a lesser price because they circumventing tax. The impact of these factors has been huge. Sales volumes were down 21 percent. Interestingly, the company only lost a percentage point of market share to the current level of 79 percent. It therefore suggests that there was an industry wide decline in sales volumes.
While the factors mentioned are not dismissible, other dynamics are possible attributes to the fall in revenue. Competition seems to have adapted to decline in demand by customers better than BAT by developing value offerings for their customers.
This is done through downsizing to smaller packs, which are more affordable, compared with the traditional pack sizes. A smoker who is faced with declining purchasing power would highly likely downgrade to the cheaper option. BAT, on another hand, has not yet made such reconfigurations to its product offerings. Instead it has focused on other business aspects such as improving distribution. Although that is also essential for business improvement, it does not address the crux of the consumers’ challenges and thereby fails to achieve growth.
Reconfiguring the production system at BAT to produce a value product will require some capital investment, according to management.
Given the company’s cash resources on their balance sheet, the investment required could be easily financed using internal resources.
The timing is unfortunately at its worst. BAT is unlikely to be able push the foreign payment to acquire the requisite machinery and technology.
After all, they have been struggling to remit dividends to their major shareholder, BAT International, and that is indication enough that foreign payments will be strenuous to execute. Competition will probably continue to enjoy migration to affordability by customers as long as the economy remains depressed. It should be concerning for BAT which can potentially lose its market share much faster than their last experience.
In other industries, the realisation to downgrade product offerings happened earlier.
Since 2013, Delta has been pushing volumes of its Super Chibuku product amid a decline in both its mainstream and premium beers. Although, on overall, volumes have been on a downtrend, Chibuku volumes has somewhat abated a drastic fall in volumes for the company. Sufficient investment into the plant was made in good time and the company can utilise existing capacity to fulfil demand.
Other companies to have also introduced value products are Dairibord, which is now producing smaller packs of their Chimombe homogenised milk. Some bread companies have reintroduced half-loaves while National Foods is now packaging a 2kg Red Seal mealie meal pack. In the manufacturing sector, companies such as NTS are also now selling budget tyres as a means of retaining their market that can no longer afford their mainstream brands. It is the sign of the times and remodelling is necessary to cater for deteri- orating customer income.
Macro-economic challenges for businesses keep mounting.
Low foreign currency reserves have been the topical matter among constraints of doing business. Most of the businesses are dependent on imported raw materials and failure to acquire them in good time results in production lags. Suppressed demand remains a challenge despite some recorded short term spike in demand for real goods after the announcement of the introduction of bond notes. Therefore, the need to offer value products remains. Without economic turnaround, consumers’ income profile is unlikely to change and neither will business fortunes. Companies ought to look at means of surviving the hardships to prevent moving into losses or at worst, shut- down of the business. BAT would need to consider the repercussions of not changing.
From an outsider perspective, with an already existing production line, adjustments to smaller packs should not cost much. This is of course debatable, given that no information on how involving the process will be, but needless to say the change is required. It remains to be seen how the business will perform going forward assuming the same product model.
The recommendation is however clear, the market is currently consuming value pack and businesses should consider offering value products where possible.
Contact the Herald Business team on +2634707241, happiness. zengeni@zimpapers.co. zw or follow us on twitter @H_ BusinessZim.