Soaring costs squeeze Dairibord

STAFF WRITER

Dairibord Holdings Limited, a publicly traded milk processor, is battling a surge in operational costs, threatening its profitability despite a recent financial rebound.

The company’s CEO, Mercy Ndoro, has raised concerns over Zimbabwe’s challenging business climate, where exchange rate volatility, rising taxation, and supply chain disruptions have intensified financial strain.

In its update for the quarter to September 30, 2024, Dairibord reported that economic instability had distorted pricing models, driven up input costs, and led to liquidity constraints.

Additionally, unreliable electricity and water supplies have increased operational expenses, while compliance with evolving regulations has further burdened the company.

These obstacles persist despite Dairibord’s improved financial performance in the first half of 2024, when it reversed previous losses and posted a post-tax profit of US$3.06m. This turnaround was largely attributed to a 78.31% reduction in finance costs, signaling efforts to tighten operational efficiencies.

However, rising costs in multiple areas continue to challenge the company’s long-term sustainability.

One of the biggest hurdles for Dairibord—and the broader Zimbabwean manufacturing sector—has been the instability of the Zimbabwe Gold (ZiG) currency.

Introduced as a structured monetary solution to replace the Zimbabwean dollar, ZiG was meant to stabilize inflation and encourage local economic growth. However, Ndoro noted that its lack of cross-border fungibility has created severe foreign currency shortages, affecting firms that rely on imports for critical raw materials and packaging.

For a company like Dairibord, which imports a significant portion of its inputs—including milk powder, packaging, and machinery—this has had far-reaching consequences.

The devaluation of ZiG in September 2024 further compounded the problem, forcing Dairibord to absorb foreign exchange losses on receivables denominated in the local currency.

“Exchange rate instability has led to pricing distortions in the market, significantly increasing the cost of inputs,” Ndoro explained.

“We have also faced challenges in sourcing foreign currency due to restrictions on ZiG convertibility.”

This situation echoes the currency crises of the past decade, when businesses struggled to manage the volatility of Zimbabwe’s monetary system.

The lack of a stable, liquid currency remains a major hindrance to the private sector’s ability to plan long-term investments.

Beyond currency challenges, taxation has emerged as another significant cost driver for businesses in Zimbabwe.

Dairibord has been directly affected by a series of new tax policies and regulatory changes, which have added financial pressure.

Among the key tax burdens that Ndoro highlighted are the special surtax on sugar content in beverages, which increases costs for manufacturers of flavored milk and other dairy-based drinks and the reclassification of VAT on milk, which shifted its status from zero-rated to exempt, raising tax liabilities and limiting input tax credits.

There is also the problem of the Intermediated Money Transfer Tax (IMTT), which has raised transaction costs across all financial operations.

“The cost of doing business in Zimbabwe continues to rise due to new taxes and legislative changes,” Ndoro said.

“These factors have resulted in notable cost pressures and cash flow challenges for the company.”

For an industry already dealing with high production costs, additional taxation only exacerbates the problem.

Zimbabwe’s dairy sector has long struggled with a shrinking raw milk supply, expensive imports, and high operational expenses related to infrastructure and logistics.

Dairibord’s predicament reflects a wider problem for the private sector: the increasing tax burden on formal businesses, which discourages investment and drives many smaller players into the informal economy.

Dairibord’s operations have also been affected by supply chain disruptions and unreliable utilities, particularly water and electricity shortages.

These challenges have led to increased production downtimes, higher reliance on diesel-powered generators, raising fuel costs, and delays in sourcing critical raw materials and packaging

The dairy processor has been forced to optimise production schedules to minimise losses, but inconsistent utility supply remains a pressing issue.

To counter this, Dairibord is investing in alternative energy solutions, including a solar power project in Chipinge.

“This initiative will mitigate downtime caused by frequent power outages and reduce our dependence on diesel-powered generators for backup power,” Ndoro stated.

Energy costs have been a long-standing issue for Zimbabwean manufacturers, with electricity tariffs fluctuating and power cuts disrupting industrial output.

The country’s reliance on imported electricity from regional suppliers has also made supply inconsistent.

Water shortages further complicate matters, particularly for a dairy processor that depends on large volumes of water for production.

The ongoing infrastructure deficits in Zimbabwe’s municipalities mean companies like Dairibord must allocate additional resources to secure a stable water supply.

To navigate Zimbabwe’s tough business climate, Dairibord has implemented several strategies aimed at reducing costs and expanding revenue streams.

These include streamlining operations to eliminate inefficiencies, investing in modernising aging equipment to enhance productivity and exploring cost-effective procurement strategies to mitigate import-related expenses.

Dairibord has also strengthening regional trade partnerships to access broader markets and enhancing toll manufacturing arrangements in South Africa.

Additionally, Dairibord has invested in value-added dairy products with higher margins and explored alternative pricing models to balance affordability and profitability

Despite ongoing cost pressures, Dairibord’s revenue for the quarter ending September 30, 2024, surged by 37% year-on-year, with cumulative revenue increasing 22% to US$91.6 million.

This growth underscores the company’s ability to adapt to economic turbulence, but sustaining profitability will require continuous cost optimization and strategic market positioning.

Dairibord’s struggles reflect the broader challenges facing Zimbabwe’s dairy industry, which has been hit by declining local milk production, rising costs, and currency instability.

Key industry trends include declining raw milk supply. The country’s dairy farmers continue to face high feed costs, low productivity, and climate-related challenges, reducing milk output.

The industry is also battling rising competition from imports. With local production constrained, Zimbabwe relies on milk powder and dairy imports, which further strain foreign currency reserves.

There is also the issue of policy uncertainties. The industry has experienced frequent tax and regulatory changes, making long-term business planning difficult for dairy companies.

Despite these challenges, the industry still holds growth potential, particularly through regional market expansion and strategic investments in value-added products.

Dairibord’s focus on cost containment, product diversification, and supply chain optimization positions it to navigate the current economic turbulence.

However, the success of these strategies will depend largely on the broader macroeconomic environment, including currency stability, policy consistency, and improvements in infrastructure.

Dairibord’s recent financial turnaround is a testament to its ability to adapt and innovate, but its long-term sustainability hinges on external factors that remain largely unpredictable.

With Zimbabwe’s economic conditions remaining fragile, businesses in the manufacturing sector must continuously evolve to stay competitive.

For Dairibord, strategic cost management, market expansion, and operational efficiencies will be key to weathering the storm.

As the company looks to the future, its resilience will be tested by currency instability, taxation burdens, and supply chain disruptions. The coming months will be critical in determining whether Dairibord can sustain its financial momentum or if rising costs will once again eat into its profits.