BAT Zimbabwe facing new challenges

The local unit of global cigarette manufacturer, British American Tobacco (BAT), has dominated the Zimbabwe market for over half a century, but emerging local brands with cheaper offerings are challenging its hegemony, pointing to a difficult road ahead for the giant.

The company reported a revenue of $34 million for 2016, its lowest since 2012, on the back of the depressed economic environment characterised by waning disposable incomes, liquidity constraints and the threat of new entrants among others.

BAT’s revenue has been trending downwards since 2012, with the highest revenue of  $51.9 million being recorded in 2012, 34 percent higher than achieved in 2016.

Although demand for cigarette is believed to be less responsive to price changes, analysts note that the industry is currently confronted with elasticity of demand as consumers opt to reduce smoking in the process of allocating limited financial resources given the tough economic environment.

The emergence of competitors with price points of 50 cents/pack has been posing challenges for BAT with customers downtrading to these value offerings, at a time when the excise duty of $20/mille presents a cap on the lowest price possible for legitimate sales (40 cents for a pack of 20s).

Recently the company told analysts at a briefing that its market share had fallen by a marginal 1 percent to 79 percent during 2016 on the back of new entrants. It stands to follow then that revenue is most likely to decline in the current period as these rivals continue to put pressure.

As such, in the previous period, the company increased its expenditure on selling and distribution by 9.4 percent compared to the same period in the prior year to $4.01 million in order to defend it’s sales volumes. 

Additionally, during 2017 the company intends to continue with increasing marketing spend in order  to defend its market share, a move that will continue to put pressure on the operating margins.

A financial analysis of BAT for the period between 2012 and 2016 shows that the performance of the company has started to deteriorate with revenue and profit negatively impacted by the operating environment.

Generally the group’s gross profit contracted over the period between 2012 and 2016, with the highest gross profit being recorded in 2015 amounting to $32.3 million.

In 2016, the company recorded the lowest gross profit ($24.7 million) since 2012 which is 17 percent lower than the one recorded in 2012.

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