Dairibord results expose industry
http://www.theindependent.co.zw/
March 28, 2013 in Business
Dairibord has arguably been accorded the status of a success story. The
company morphed from a parastatal dairy processor into one of the country’s
few privatisation success stories. Today Dairibord is a listed corporation
and as a relatively large, consistent performer, many consider it a blue
chip company.
Report by Collins Rudzuna
Naturally therefore, Dairibord’s financial results are some of the
most-awaited by stock market analysts.
Much-awaited as they were, Dairibord’s financial results turned out to be
nothing to write home about. They were “neither here nor there” as some like
to put it.
Volume growth across the company was 10%, and coupled with static consumer
prices, this led to modest revenue growth of just 11%. Sales volumes in the
foods unit were up 21% while beverages and milk volumes rose by just 10% and
4% respectively. Profit margins were slightly lower, resulting in profit
growth of just 1% to US$7,2 million.
Management were at pains to justify to analysts, journalists and the
investing public why their financial results were so subdued and to explain
their plan for recovery. Some of the statistics given in the course of this
explanation related to the national herd of dairy cows and the level of
national milk production.
Zimbabwe’s dairy cow herd now stands at only 26 000, down from a peak of 119
200 in the 1990s. Correspondingly, milk production peaked at 257 million
litres, but is now only 54 million litres. That is a decline of more than
78% for both measures! Taken in the context of an increasing population, the
extent of decline in the dairy industry is shocking, to say the least.
Thankfully for Dairibord, since its days as a parastatal the product
portfolio has been diversified from just milk to include a wide array of
value-added foods and beverages. Profit contribution from these products now
exceeds that from milk sales. Yet one cannot shake off the fact that milk
remains the staple of the company’s existence. In recognition of this fact,
Dairibord’s management is embarking on an ambitious new plan that it not
only hopes will guarantee milk supply for the company, but perhaps revive
the dairy industry as a whole.
Dairibord’s plan for revival of dairy farming involves acquiring heifers and
loaning them out to farmers. In return, farmers will provide milk to the
company. An initial batch of 250 in-calf heifers has already been disbursed
to 10 farmers. An additional one million litres per annum is expected from
this batch. Ultimately, the company hopes to import a total of 1 000
heifers. One cannot help but applaud Dairibord’s initiative in trying to
solve the industry’s problem of a depleted herd. As the heifers calve, the
herd will also continue to grow. Yet this ambitious plan is not without its
potential pitfalls.
Farming has always been a business with many risks. For dairy farming, this
risk is exacerbated by the fact that each animal represents a significant
investment which has to be protected and managed with absolute care. The
average cost for each animal imported by Dairibord is US$2 000. That is a
lot of money to invest in an animal. Putting assets worth that much into the
hands of third parties can potentially be ruinous should something happen to
them. One hopes the animals are adequately insured.
Dairibord’s heifer programme is just the first step of many that need to be
taken to restore the viability of the dairy industry.
A few new players have sprung up in the industry and they are giving
Dairibord a run for its money. Kefalos, Dendairy and Alpha & Omega
immediately come to mind.
If these and other players could also do their part to help replenish the
national herd, that would be a good thing. They may even consider a
different model, perhaps backward integration into dairy farming.
Increasing industry capacity solves only one of the challenges being faced
by the local dairy industry. Another shortcoming that was exposed during
Dairibord’s results briefing is the flood of imports from South Africa.
Imports now make up a significant portion of milk consumed in Zimbabwe. In
fact, imported brands of long life UHT milk are more visible than local ones
in the supermarkets. This is not to blame the imports, which have bridged an
unsatisfied gap between demand and supply. South African milk lands here at
a lower price which cannot be matched by local producers, thus making
locally-produced milk uncompetitive. A litre of imported milk lands in
Zimbabwe at about US$1,05 while locally-produced milk costs US$1,20 — a gap
of 14%. The difference emanates from local raw milk being more expensive to
produce than in South Africa and the region in general. Raw milk costs 62 US
cents a litre locally compared to 40 US cents and 44 US cents in South
Africa and Zambia, respectively.
Dairibord has tried to bridge the gap by importing toll-produced UHT milk
under its own brand “Chimombe”. Although this ensures the brand remains
visible in the market, ultimately, it is still a cheaper import which makes
local milk uncompetitive. Dairibord management admitted that this is a
stop-gap measure, the ultimate goal being to revitalise local milk
production.
Milk is an essential source of nutrition and government is unlikely to ban
imports, especially where local production falls short of demand. Government
could, however, investigate whether there are certain unfair practices by
South African dairies which make their milk cheaper. Namibian dairy farmers,
for example, once accused their South African neighbours of predatory
pricing, using genetically modified feeds and on-exporting sub-standard
Brazilian milk.
Dairibord’s results were indeed subdued; the market usually expects a more
robust performance from blue chip companies. Most of the weaknesses are
nonentheless external to the company itself and are more to do with the
state of the dairy industry.
Dairibord has taken the bull by the horns and tackled some of these problems
head-on. However,there is only so much that a company can do. Only when the
industry can rebuild the national herd, produce enough milk to meet demand
and lower production costs can it become competitive.
Meanwhile, consumers will have to remain content with imports. Local milk
producers also have to deal with stiff import competition.