When Zambia Sugar’s Corporate Affairs Manager Sally Namutowe made the July 2018 press statement that her company was engaging employees in effecting a voluntary separation program, we were not surprised that the sweetest company in Zambia was considering a cost reduction strategy to save its position.
According to an extract from her statement, Sally indicated that management was targeting a minimum of a 10% reduction in annual wage costs for the company. Administration costs are usually the bitter sweet option for any firm that desires to reduce costs. In Zambia Sugar’s case, this position has not come lightly.
A review of the paper published by the World Bank (title: Competitive Commercial Agriculture in Sub-Saharan Africa Study) exposes the political economy that exists around the commodity sugar. Whereas some of the largest producers of sugar such as South American countries have often enjoyed subsidizes on the commodity, their African counterparts have not. Furthermore, with quotas in place on who accesses certain market, it is clear that it is a difficult position for ZamSugar to “take advantage” of a seemingly unequal market.
So, Porters 5 forces of competition that can best explain the why companies in this industry are struggling owe it to the external forces of competition that have been determinants of the price of the product.
However, one may also argue that in modern times of price elasticity of demand for a product that has been loosely controversially associated with health concerns, to the extent that some may even consider substitutes, we argue that external forces have made the demand curve (price against quantity) ever more complex. Explained simply, if growing revenue was ZamSugar’s main concern, why can it not consider increasing prices? But if it did increase prices that would mean it risks reducing the quantity it sells. Alternately, if it chose a Baumol approach where it decided to reduce the price of the commodity in the hope of getting more sales, the invisible hand that exists on international markets would not let it.
Therefore, we sympathize with the Management team of ZamSugar in their decision to downsize. We understand that preservation of shareholder value comes first in any listed going concern. It is unfortunate that all this comes at a time when investors would be hoping to see the results of the Product Alignment and Refinery project (aptly known as Project PAAR). A review of their company’s financials (which we have published here) indicate that this was a substantial under taking.
Going forward, we anticipate leaning expenditure and a reduction in capital intensive projects as the company tries to find its balance going forward. Fizambia.com will be on hand to review their next steps.