Zimbabwe: Rising costs of Milk Dairibord’s profit margins
Dairibord Zimbabwe Limited CEO Anthony Mandiwanza said cutting costs remains a key issue to protect the company’s margins for fiscal 2021.
During the first five months of the year, the Zimbabwe Stock Exchange listed entity was faced with the rising cost of doing business.
Overall, costs for the five months through May 31, 2021 have increased by 452%, leaving the group with an operating profit margin of just 7%, Mandiwanza said in a business update during the company’s annual general meeting held last week.
Mr. Mandiwanza told shareholders that the cost increases were general, from imported raw materials to the cost of borrowing.
“The price of fuel and milk powders has increased in the world market and this has resulted in increased imported inflation,” he said.
International Brent crude has risen 40% on average this year. Locally, the price of diesel has increased an average of 9.9 percent, in US dollars, while gasoline prices have increased 5.6 percent since the start of the year.
“The cost of fuel is becoming a major cost variable, primarily driven by the need to source this fuel in foreign currency, while labor has also contributed as a key cost driver,” Mr. Mandiwanza.
He said the rainfall regime, which was important at the start of the year, was negatively impacting milk production and leading to associated problems such as the increased cost of raw milk.
Raw materials and packaging have been affected by domestic and imported inflation, Mandiwanza added.
Regarding the financing of the company, the head of Dairibord said the cost of financing was higher than the previous year due to borrowing to support imports of raw materials and packaging.
He said the Group needed to take a strategic position to hedge against increases in commodity prices.
“Interest rates were high, up to 50 percent and of course longer working capital cycles. All of this contributed to a high cost of funding.”
Going forward, Mandiwanza said he does not anticipate an immediate stay on interest rates, which means financing costs will remain a hurdle.
Excluding cost issues, demand for the Group’s products remained firm during the period under review.
However, the activity was unable to meet demand, particularly for milk and milk-based products due to constraints linked to raw milk.
Nationally, demand for dairy products exceeds supply by more than 50 million liters per year.
“However, the performance to date is better than the same period last year.
“Our sales volumes for the period grew 49 percent compared to the same period last year. This is mainly due to an 18 percent growth in dairy products despite supply constraints.”
Food sales volumes increased 45 percent and beverages 78 percent from the previous year. Turnover grew by 463% in historical terms.
The revenue generated in the export market was stronger than last year and the combined exports and domestic forex nostro now constitute 15% of the turnover.
Mr. Mandiwanza said the availability of foreign exchange improved over the previous year, thus improving the availability of key imported materials.
The Group was able to meet 46 percent of the foreign exchange requirements of the RBZ auction system, 46 percent of domestic revenues and the balance of exports as well as the interbank market.
Looking ahead, Mandiwanza expects growth projections for the country to help strengthen aggregate demand in the near term.
However, the containment measures will have the effect of disrupting this dynamic, in particular on the supply side both at the local level and at the level of imports.
“There are some key issues that must underpin short-term performance, namely the constant availability of foreign currency on both auctions, local sales and export growth,” Mandiwanza said.