Surrendering markets to informal sector suicidal

21 May, 2023 - 00:05 0 Views
Surrendering markets to informal sector suicidal Formal businesses are facing fierce competition from informal traders

The Sunday Mail

Munyaradzi Hwengwere

ZIMBABWEAN businesses are in a big dilemma.

How do they respond to a growing informal sector that is eroding their market share and is not constrained by market rules and regulations?

In light of the marauding informal sector, a number of large businesses have opted to retreat to their most guarded fortresses — reducing their advertising spending, limiting general marketing budgets and playing gymnastics with pricing, all in the hope of surviving the assault.

The market has shown no mercy.

Instead of understanding the plight of big businesses that have to contend with a shifting policy environment and an unstable Zimbabwe dollar, consumers continue to flock to the informal sector to buy in United States dollars.

They run away from what they see as overpriced local goods.

In response, local businesses that are compelled to price based on the formal auction market, with a 20 percent margin, have resorted to forward pricing.

In essence, this means anticipating the future Zimbabwe dollar exchange rate against the US dollar and using that as the pricing unit.

Unfortunately, by forward pricing, a number of businesses have found themselves in even bigger problems.

The consumer is a rational buyer and has been quick to realise that they can change the Zimbabwe dollars at the prevailing exchange rate and dash to the informal sector tuck shops to buy their desired product at half the price the formal sector charges.

The consequence for our beleaguered large businesses is depressed demand.

This situation only changes when the parallel market exchange rate overtakes the forward price, at which point the Zimbabwe dollar-priced product is cheaper and possibly sold at a giveaway.

Our businesses, thus, face either depressed demand or are having to sell at low margins, if not at a loss.

Government, too, has been unhappy.

The authorities have interpreted forward pricing as some form of blackmail and economic sabotage during an election period.

In its recent policy intervention, Treasury flexed its muscles by doing two things.

Stipulated goods are being allowed into the country duty free.

This move can only further benefit the informal sector that was already smuggling most goods into the country.

They can now import with minimal hustle.

Even if the formal retailers choose to benefit from this new policy, they still must contend with pricing at the prescribed official exchange rate.

The local manufacturer who has been devising their own channels to the informal sector now has to compete with duty-free imported goods.

This is double jeopardy for local manufacturers and retailers.

The second policy intervention was that Treasury allowed companies 100 percent retention on all domestic foreign currency revenue.

This has been greeted with joy by the market.

Given the lopsided foreign currency market, the previous 15 percent surrender requirement basically meant a significant portion of companies’ foreign currency was compulsorily devalued.

An immediate consequence of this measure will be to increase the amount of US dollars in circulation and promote greater disposable incomes by companies and individuals.

It is anticipated that this will ease the pressure on the Zimbabwe dollar and lead to a more stable exchange rate.

The downside is that, as long as prices in the formal sector remain high, the increased foreign currency earnings are likely to be directed to the informal sector, which currently has a pricing advantage.

Some manufacturers may also try to find a way to be more aggressive in supplying goods and services to the informal sector and desert formal retailers and wholesalers, who will continue selling the bulk of their products in local currency.

The question that arises then is: What options do large businesses have under these very challenging times?

We argue that retreating from facing competition head-on has grave danger.

It must never be forgotten that today’s large supermarket chains were yesterday’s mom-and-pop stores.

The thinking that the informal sector is on the market for a relatively short period may not be wise.

This new threat must be confronted head-on.

Slashing advertising budgets, as is being done, and concentrating on so-called key markets are a risky move.

Walmart began its march to dominance in a small US town.

Nothing stops emerging small businesses from starting from one tuck shop and transforming into a giant.

In any case, by engaging with clients, the informal sector is building a better understanding of the local consumer.

The innovative ones will soon be capable of providing solutions in sync with new market realities.

Amazon began by selling books and today has overtaken Walmart as the largest retailer.

Markets are always changing.

Winners will always be the ones who are in touch with the market.

Big businesses must continue engaging Government.

It must never be an option to stop interactions with Government to reconsider some of its policies.

It is natural for businesses to retreat into their corner after failing to reach desired outcomes.

A well-known fact is that the current dual exchange rate is killing big businesses and favouring the informal sector and those who trade in US dollars.

Businesses have unsuccessfully sought to have these exchange rates converge but every effort has hit a brick wall.

Pragmatism in business demands that sentiments for or against policy makers pave the way for the need to safeguard the interests of organisations.

If there is one thing to be learnt from Zimbabwe’s hyperinflation period, it is that businesses and Government continued to meet until a solution was found.

At a political level, many assumed our seemingly entrenched political rivals were unlikely to sit on the same table and craft a solution for national development, yet that is what happened.

The transition to the Second Republic is possibly one of the few examples in the world where bitterness was calmed by the need to forge ahead and spare the country from collapse.

Rather than have bloodshed, Zimbabweans danced and embraced on the streets.

It, thus, must never be taken for granted that positions are permanent.

It is in the interests of businesses in Zimbabwe to ensure Government has policies that protect them.

If the informal sector must grow, this must not be at the expense of businesses that are complying with the law, employing people and paying taxes.

It is not in the interest of the country to promote an underground economy.

Businesses, too, must refrain from seeking to second guess the market.

While forward pricing may seem sensible, it has attracted the wrath of both consumers and Government.

It is a policy that kills trust and, thus, has little merit.

Equally, choosing some markets over others and slashing advertising budgets ultimately destroys brands.

It is better to negotiate for lower prices than abandon customers in times of need.

I come from the Midlands province and I have not heard big brands advertise on local radio stations there for most of 2023.

Markets must be defended at all costs.

While big businesses in Zimbabwe have legitimate concerns and feel let down in their competition against the informal sector, some of their responses need rethinking.

Surrendering markets and influence must never be an option.


Munyaradzi Hwengwere is the chairman of Buy Zimbabwe, an organisation that promotes consumption and production of locally produced goods and services. [email protected]


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