17 August 2017

Zimbabwe: FMCG, Beverages Down-Trade As Demand Weakens

The fast moving consumer goods (FMCG) and beverages sectors are increasingly down-trading to value products as aggregate demand continues to weaken, reflecting underlying sluggish economic growth, analysts have said.

Household spending declined 11,8 percent in 2016, on the back of lower disposable incomes, as the economy grew by a marginal 0,7 percent, against a projected 2,7 percent, due to the effects of a bad 2015/16 season for agriculture.

The economy is expected to expand by 3,7 percent this year, driven by a good farming season, but demand is still seen constrained by spending cuts and high unemployment.

Equities firm, IH Securities (IH), last week said manufacturers continue to struggle to stimulate sales as most Zimbabweans have cut back on spending.

"Declining disposable incomes have severely affected the beverages segment. We have seen a significant migration from aspirational high margin product to low margin affordable products as well as value-added packs ... The FMCG sector will continue to experience down-trading to value offerings, as disposable incomes are expected to remain under pressure," IH said.

Major consumer-facing firms such as BAT and Delta have reported weak sales in their premium product lines, while low-end value products have proved resilient.

Firms in the cut-throat dairy and edible oils market segments have also introduced smaller packed products to chase the low-end dollar.

The smaller packaging trend, which was birthed by the country's growing informal sector, allowing consumers to access products for as little as possible, has been making inroads with most manufacturers downgrading.

Instead of fixing their prices downwards to match dwindling incomes, most manufacturers have introduced smaller packaging for their products, to accommodate low income earners.

Renowned economist, John Robertson, said the migration to low-end products and smaller packets was a reflection of the country's deepening economic crisis.

"The migration by most Zimbabweans to cheaper brands is a direct reflection of the country's hostile economic conditions which have seen thousands of Zimbabweans lose jobs in the wake of massive company closures.

"It is only a survival tactic because they have woken up and smelled the coffee. It is not pretty out there, so they have to adjust their packaging accordingly," the economist said.

With 100 millilitre (ml) cooking oil bottles from the traditional 750ml and 2 litre (l) bottles to one kilogramme (kg) mealie-meal packets, down from the usual minimum of 5kg the country's manufacturers have been trying to adapt to a toughening operating environment.

Reflective of the worsening economic conditions, tight liquidity and ever-shrinking disposable incomes among Zimbabweans, Nestle Zimbabwe (Nestle) recently became the latest company to join the trend after it launched a new lower-priced sachet product line targeting low income earners.

The company's managing director, Ben Ndiaye, said the firm had realised most Zimbabweans could barely afford its products leading to the launch of the new lower priced line.

The new line made up of sachet product lines comprising of Cremora 40g, Cerevita 30g, Cerevita Flakes with Milk 45g (an instant pre-mix version of the cereal which comes with powdered milk), and Everyday Milky Tea 25g (a powdered milk pre-mix variety that comes with tea and sugar) will be retailing below $0,40.

IH also pointed out that the two sectors were going to record subdued growth in the last half of the year.

"Using Delta's portfolio as a proxy, third quarter 2016 which covers the festive season showed a continued downward pressure on all segments particularly the sparkling beverages which have been impacted by the increase in imports from neighbouring countries which are covered by preferential trade protocols that are fuelled by the currency arbitrage opportunities ... This trend will continue in both sectors this year as growth remains subdued," the analysts said.

IH pointed out that while Zimbabwe's import restrictions were expected to improve capacity utilisation in the FMCG segment, depletion in nostro balances was expected to have a negative impact on the sourcing of key raw materials.


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