eBusiness Weekly
The recent spurt of intense inflation and rising prices, in both US dollars as well as in Zimbabwe dollars has not just caused anguish among consumers but has perturbed the Government which is no seeking more data, reasons and answers.
Quite a lot of what is happening, although not all, can be traced to the sudden meltdown in the black market exchange rate over the last two or so months, partially mirrored by the successful bids on the Reserve Bank auctions and in the interbank rate, although the premium between the illegal and legal markets, at least for those buying foreign currency on the black market, has widened.
Curiously the premium for those selling foreign currency to black market dealers have seen some but far less movement in the premium, so the profit margin between what the black market dealers pay for US dollars, and what they sell those US dollars for has widened considerably.
That implies, if nothing else, that there were stocks of US dollars hidden away that someone is now running down. It is also possible that the accumulators who operate between the pavement dealers and the big forex buyers have increased their margins. Perhaps this is a minor point, but it still needs to be checked out.
The problem has been exacerbated by forward pricing with the amount of forward pricing depending on how scared some in the business world are, plus efforts to get round the Government edict that retail prices in local currency have to use the interbank mid-rate plus 10 percent when calculating the Us dollar or local currency prices.
This particular effort basically starts with a US dollar price, converts to local currency at the black market rate, or the rate expected next week, next month or a couple of months time, depending on who is doing the sums and making the guesses, then converting back to US dollars at the official or the supermarket rate, and then fixing that as the US dollar price. The result is a jolt in prices in both currencies, which is what we are seeing for some products.
There is also suspicion, and retailers in the formal sector have brought this up, that distribution chains are favoring the informal sector tuckshops, where prices are set in US dollars, so causing shortages. To that can be added a couple of other factors.
Consumers paid wholly or partly in foreign currency will tend to stock up with the non-perishables on pay day, and there will be some out there who buy large orders of goods in supermarkets and transfer these to the informal sector to sell in US dollars.
The Government has reacted with a cocktail of measures that have worked in the past. For a start the gold tokens, virtual gold backed by real gold in the Reserve Bank basement complex. These removed $14 billion in just four days last week, slashing the supply of local currency, and adding to the $25 billion plus the gold coins had removed from circulation over almost seven months.
That is a lot of money not going into the back market, and showing that there is a strong streak of honesty and a distaste for black markets in much of the business community.
Secondly a determined effort is being made to make the auctions a lot more responsive. Thirdly the Ministry of Finance and Economic Development has taken over the foreign debt, using the foreign currency it earns from taxes in foreign currency, rather than relying on the Reserve Bank. If 70 percent of transactions are in foreign currency then 70 percent of VAT is in foreign currency.
Fourthly imports of 14 basic products can now be imported without special licence and duty free, easing artifical or even real shortages, and certainly putting a limit on pricing by Zimbabwean suppliers. Fifthly GMB is to push its Silo brand of mealie meal.
The next step is new, unleashing the Competition and Tariffs Commission. This presumably will check out potential collusion, or market dominance, in both manufacturing and retail sectors. In retail there is unlikely to be anything important.
The top of the retail sector is dominated by six supermarket chains, two very larger and four significant but smaller. They are in intense competition, but it is still worthwhile to check to confirm there are no special meetings, zoom calls or a couple of threesomes on a golf course.
But besides those six there are a lot of independents, including some very substantial wholesalers who accept at least some retail custom.
It seems impossible to organise collusion. Supermarkets tend to work on fixed percentage mark-ups, lower for products with long shelf lives and higher for fresh foods because of inherent waste.
Manufacturing is different. Although there is quite a bit of competition, there are also some very dominant companies or groups of companies, and for some products just one or two suppliers can dominate market, that is sell more than half the supplies.
This is where the Competition Commission will need to dig, to see if that growing bundling encourages inefficiency, with its costs, or even allows pricing formulas that guarantee high profit margins.
We are not talking about criminal activity here, or even breaches in regulations, and that is important. But we are talking about community interests where a small market in a small country can lead to a single entity dominating a market.
For a wide range of consumer food products we can take Innscor as an example, particular as just one of its associated companies advertises itself as the largest food producer. This is in some ways a curious conglomerate, rarely owning 100 percent or even a significant majority of anything.
On the milling side it owns 37,45 percent of Natfoods, according to its website, 100 percent of Bakers Inn production (the shops are in Simbisa) and 49 percent of ProFeed, a second stockfeed producer.
While Natfoods is a separate listed company, Innscor and Tiger Brands of South Africa are the two largest shareholders, with almost identical shareholdings, and a workers trust is in the number three slot.
Innscor and Natfoods are not at arms length. The Innscor CEO and CFO sit on the Natfoods board and the Natfoods managing director sits on the Esecutive Committee of the Innscor Main Board. They are run together.
The Competition Commission at one stage was worried about the ProFeed shareholding, combined with the Natfoods output, giving too great a market dominance.
Innscor also owns 49 percent of Irvines, a 100 percent of Colcom, 50,1 percent of Associated Meat Packers, known to many consumers as Texas Meats, and 39,2 percent of PRObrands, which used to compete with NatFoods for some products and which is still operates separately.
It also owns 50,1 percent of PROdairy, a major milk supplier although probably not the largest, and 50,64 percent of PRObottlers, a mid-market beverages supplier. There are other bits and pieces.
It must be stressed that the accumulation of this empire was totally legal and often for good business reasons. But its size and the control it exercises, plus the dominant or major position in so many products, means that a single business decision, or even a single mistake, can have a major impact.
Yes there is completion, and some competitors in some areas are large, but it is extraordinarily difficult, although just possible, for a single consumer not to be buying something every month from this company.
That sort of size, and it is mirrored with Delta in alcoholic beverages and few other industrial giants means that the Competition Commission has a right, and perhaps a duty, to continually monitor these giant concerns. Criminal activity is highly unlikely, but the danger arises from a bad decision by a tiny group of managers.
For some products there is real competition, at least when supply bottlenecks are sorted out. For cooking oil, for example, we have four major producers and two very intermittent suppliers. But the big four are separate companies with no links.
All produce a pure soya product, but two now also produce a sunflower oil, and two also produce a cotton-seed soya blend. One manages all three.
Technically a foursome at the Royal Harare course could fix prices, but that is unlikely and again, like the supermarkets, it just needs the authorities to keep a benign eye open in case something goes wrong.
Once you have markets split between several competitors it just needs one to refuse collusion and instead grab the market share of others, so no one seriously tries.
But we saw with bread that what amounted to a fixed price for all bakers was possible, so we have to enforce competition rules and tighten them when necessary.
