25 May 2017

Zimbabwe: Delta - No Cheer for the Brewer

Delta Corporation, the country's biggest brewer, is feeling the pinch of an unrelenting economic crisis in the country, with customers continuing to cut back spending on beer.

The situation has resulted in almost all key financial indicators at the dominant producer of commercial beer in Zimbabwe, which enjoys over 90 percent of the beer market in the country, taking a slump.

Zimbabwe has always been known as a beer-drinking nation, with a recent report by the World Health Organisation placing the country and South Africa top in alcohol consumption in Africa.

But Delta has recently witnessed constrained aggregate demand, which has resulted in sales volumes dropping during the year to March 31, 2017. Lager beer volumes went down seven percent, while sparkling beverages and sorghum beer went down 11 percent and three percent respectively.

Analysts indicated that the decline in volumes is likely to continue because of the liquidity challenges in the country, which have been worsened by company closures, which are squeezing out lower income consumers.

The shrinking buying power has forced Zimbabweans to shift to other choices, with many turning to toxic brews such as Zed, a Mozambican brand which most imbibers call "the emergency drink". This brew is popular in illegal beer outlets notably in the poor neighbourhoods.

Other drinkers who are growing in numbers have resorted to draught beer which is making a huge mark in the market.

As a result of these developments, the Zimbabwe Stock Exchange-listed conglomerate has suffered, forcing it to adjust prices downwards over the last few years as consumption dwindle due to declining real disposable incomes.

Due to high unemployment levels, estimated at over 90 percent, many people have been forced into the informal sector, where incomes are unreliable.

Rabiro Mangena, head of corporate finance at BDO Chartered Accountants, said Delta's condition was likely to continue.

Mangena said: "Firstly, focus was on growing the top line (revenue). But as demand was decreasing focus started to shift. They started looking at other areas to improve such as cost control. But in this area, there is a limit. One cannot go beyond a certain limit because the company might not be able to function efficiently. The fact that almost all key indicators went down means they might have exhausted all areas of cost cutting. The situation is likely to continue because the economic crisis is worsening, making it tougher for businesses."

Solomon Chagumira, a consumer based in Harare, said: "We used to drink our beer every day after work. But it is now difficult for us to continue spending a lot of money on beer. Money is now so important that you cannot part with it for beer. We are now going out to drink on Fridays only because we cannot afford drinking everyday anymore. We are now prioritising paying rent, school fees and transport, among other things."

In its financial results released recently, Delta's revenue tumbled by 10 percent to US$483 million during the year to March 31, 2017 due to subdued sales, from US$538 million reported during the comparative period the previous year.

Its operational efficiencies came under severe pressure, as reflected by the deteriorating margins, with earnings before interest, tax, depreciation and amortisation dropping by 13 percent to US$112,8 million.

The slowdown has also affected earnings per share. During the period under review, Delta's earnings per share dropped by 12 percent to US$5,69 cents compared to US$6,48 cents recorded in the prior financial year.

Its operating income retreated by 15 percent to US$82 million during the period under review, from US$96 million the previous year.

Profit decreased by 13 percent to US$70 million during the review period, from US$80 million in previous year.

"The company experienced significant challenges during the year, characterised by constrained aggregate demand, limited access to cash, challenges to payment platforms and delays in foreign remittances," said Delta board chairman, Canaan Dube.

"Lager beer volume is down seven percent, sparkling beverages down 11 percent and sorghum beer is down three percent against last year. There was a marked increase of soft drinks imports in the second half of the year while the inaccessibility of the markets from heavy rains was more pronounced on the sorghum beer volumes."

Delta's total assets during the period under review, however, increased to US$704 million, from US$696 million recorded in the previous year.

Delta has a diverse portfolio of local and international brands in larger beer, traditional beer, Coca-Cola franchised sparkling and alternative non-alcoholic beverages. It also has investments in associate companies whose activities are in cordials and juice drinks, wines and spirits.

The company listed on the local bourse in 1946 as Rhodesia Breweries Limited. Its origins, however, date back to 1898 when the country's first brewery was established in Harare.

By 1950, the company had built Sable Brewery in Bulawayo, producing Pale Ale, Milk Stout and Sable Lager.

Over the years, the company continued to expand its portfolio of businesses and diversified its brewing base.

In 1978, the name was changed to Delta Corporation Limited and the company assumed the mantle of a holding company for a broad range of interests serving the mass consumer market.

These included lager and sorghum beer brewing, bottling of carbonated and non-carbonated soft drinks, supermarket and furniture retailing, tourism and hotels and various agro-industrial operations.

The hotel, supermarket and furniture retailing businesses were de-merged from the group between 2001 and 2002, resulting in Delta focusing on the core beverages sectors.

Some supply chain related investments remained part of the group until 2014 when the plastic packaging entity, MegaPak, was demerged.

The company has a minority shareholding in the now-consolidated packaging group called NamPak Zimbabwe, which took over the MegaPak business.

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