THE year 2020 has come with a lot of shocks for Zimbabwean businesses, including those that have for decades weathered the storm.
These shocks stemmed out of the outbreak of the Covid-19 pandemic.
To find out how these traditionally strong businesses have fared, our chief business reporter Taurai Mangudhla (TM) interviewed Truworths CEO Themba Ndebele (TN).
Their discussion took place in the context of Truworths’ financial statements for the year ended July 2020, which came out recently.
Below are excerpts from their discussion:
TM: Looking at your trading update, I notice that revenues have not grown much, but costs more than doubled. Please explain what has been taking place during the review period?
TN: It is simple, we had no revenue from March 30 until May 15 because we were not an essential service and our costs remained fixed.
One of the biggest costs in there is auditing, they remain fixed whether you are open or you are closed and you know audit fees are charged at the time you do the audit, which has absolutely no relation to what the costs were for the previous 12 months especially in a hyper inflationary environment.
All our IT (information technology) costs are US dollar-based.
Even during that lockdown we still had to pay those IT costs and connectivity because our customers still have to service their accounts electronically and so forth.
We also had the fuel issue, the realignment of the fuel prices in line with the exchange rate.
We also had the Covid-19 expenses, which were not there the previous year.
TM: Covid-19 has clearly put you off-track. What is the picture right now? Are you making up?
TN: We are back on track except for the Harare central business district (CBD), which is still slow, but it’s actually recovering.
TM: What are the issues with Harare CBD? Why is it lagging behind?
TN: It’s because people, I mean most banks, are still working from home.
The traffic has not been much in town.
Civil servants are also still working from home.
It is not good for us. When people work from home, they don’t really need to buy new suits and shorts or trousers.
As analysts, I am sure you pick up on that easily.
If you go through accounts from the UK, for instance, that change with people working from home has basically changed the way people dress.
Will teachers, who are not going to work, buy new clothes and so forth?
That has been the impact of the Covid-19 lockdown.
But things are starting to go back to normal with our outside Harare CBD stores now trading very well.
TM: The festive season is upon us, and this is your peak period. What are your targets for the festive season?
TN: Christmas is very key in terms of our business, but you know this is going to be a difficult Christmas because one of the biggest employers in the economy is government.
They will pay bonuses, but their salary dispute dampens the confidence and the mood.
We are now going into kids’ season. Christmas is for kids and we expect Christmas to reflect that mood.
TM: Last year you had plans to start producing chinos locally. How far have you gone?
TN: We are actually doing Topics chinos and Number One chinos. We are all now doing in-house.
TM: What has been the impact of doing chinos locally to your costs for that particular item?
TN: It improved product availability and it improved our margins because now it is locally produced.
TM: Locally manufactured products have struggled to compete with imports in terms of quality and production costs. Can you speak a bit around these two?
TN: We are importing material from China, but that supply chain is disrupted at the moment due to Covid-19.
TM: What have been your top selling items during this lockdown?
TN: Our top selling department during this lockdown and this transition has been our casual.
There has been a shift from formal to casual wear because of people working from home.
TM: What has been the impact of this shift to margins, I imagine casual is not as profitable as formal wear?
TN: Casual wear hasn’t got the high prices like formal wear.
Casual wear has lesser margins because that is actually what you find mainly in these car boots and these containers.
It’s not specialised.
TM: Rental costs are quite significant, what’s the strategy going forward?
TN: Our rentals are linked to turnover and trading.
One of the things when you actually look at it with rentals, unlike in South Africa and the UK where there were rental concessions, which were basically funded by the government, in this country those concessions were not there.
So we actually paid rents on those premises during that lockdown and we were not trading during that period.
The long-term strategy is there, we always link our rentals to turnover.
But this year our rentals moved ahead of turnover growth because of lack of trading during the lockdown.
Our target is to increase volumes.
Last year Christmas was depressed, we are hoping this year it gets better and our targeted volumes are higher than last year.
TM: Government and other employers are struggling to pay decent wages. What has been the impact on your business model, which has traditionally thrived on credit?
TN: Our strategy is that even if government pays people, we will not increase our credit limit.
We are not in an expansionary credit limit increase mode at this point in time.
We have reduced our credit periods, we have reduced our credit limits and we are not granting any new credit.
We are moving more towards cash sales.
TM: What is your credit period right now?
TN: It is a maximum of six months, whereas previously we did six, nine and 12 months.
If you look at our analysis in our debtors book, you will realise that our turnover went up by 246% but our debtors only went up by 76%, that’s showing you the shift onto cash sales.
TM: What is the mix, currently, between cash and credit sales?
TN: We are 65% cash, but it has always been 25% cash and 75% credit.
You don’t want to totally eliminate credit sales because you don’t want to lose your customers.
So we still look after our credit customers.
What customers are actually doing, because of the reduced credit limits, is that they are paying deposits to make up for that which then reduces the credit that they are getting.
Let’s say your credit limit is $3 000 but you want to buy for $10 000, all you do is you utilise your credit limit up to $3 000 and then you pay the $7 000 in cash.
TM: Finally, what has been the impact of the dual currency system on your sales? Are people buying in US dollars now? And how helpful has been the auction system to your business?
TN: The amount of US$ is still very low. Not many companies here are paying full US$ salaries.
If people are paid full US$ salaries, then you will see a change.
While we still get people buying in US$, they are very few, it’s not sustainable unless we fully dollarise.
But there has been some benefits after the auction system came in terms of raw materials supply.