Smuggling syndicates hit Nestlé operations

via Smuggling syndicates hit Nestlé operations 15 August 2014 by Faith Zaba

RAMPANT smuggling of food products into the country by an underworld network with military links is threatening to put Swiss-headquartered global food and beverages giant Nestlé’s local operation, Nestlé Zimbabwe, out of business as it is undercutting the company through substantially less than fair value prices.

The smuggling syndicate, connected to powerful military figures in Zimbabwe, are illegally importing and selling various products, including dairy ones, at lower prices, making Nestlé unable to compete as it produces on an unsustainable high-cost structure, while reeling from a liquidity crunch and an overvalued exchange rate in a multi-currency regime.

As a result of various economic factors, including smuggling, Nestlé has been contemplating scaling down or closing because continuing to operate under the current circumstances is counter-productive and uneconomic.

Nestlé’s brands include baby foods, bottled water, cereals, chocolate and confectionary, coffee, culinary, chilled and frozen food, dairy products, drinks, food, health nutrition, ice cream and pet care.

Besides economic and smuggling problems, Nestlé has since 2009 been facing political hostility linked to President Robert Mugabe’s Gushungo Dairy Estate.

The impact of smuggling by the top military brass forced Nestlé management to write to government seeking intervention. It has considered the option of downsizing or closing down.

In a letter to Industry and Commerce minister Mike Bimha, copied to Finance minister Patrick Chinamasa and Industry and Commerce permanent secretary Abigail Shonhiwa dated August 8, Nestlé managing director Kumbirai Katsande said “irregular imports” were damaging the company and investment prospects.

“Apparently, government institutions or at least one such entity has been issued with import licences to import, among other finished goods, Cremora,” writes Katsande.

“We understand huge quantities of these products are already in warehouses in the country and being offered to our customers at much lower prices than what we sell at from our factory. We further understand that the goods were imported duty free! And government is fully aware of this situation including Zimra (Zimbabwe Revenue Authority).”

Katsande further says: “This is truly disturbing. We are supposed to be promoting ZimAsset, promoting investments in manufacturing. This behaviour by this government entity, and we believe you are aware of the goings on, is damaging to the investment drive which even the state President and the rest of government are championing.”

Official sources say following Nestlé’s complaints, government is investigating the smuggling network, which has not only been sabotaging just Nestlé, but also other companies as well and the economy in general.

Government sources said the investigations are pointing to a network of top military figures smuggling products like Cremora, cooking oil, snacks like jiggies, sausages and chickens from Brazil. The sources said up to 20 huge trucks of groceries were intercepted by Zimra over the past 10 days and the probe is leading to military-based networks.

Katsande said Nestlé is one of the few surviving companies that pays its taxes on time and must be protected from illegal and criminal economic activities.
“Yet government (entities) proceed to deliberately undermine all our efforts? Only recently, the exchange control authorities approved an US$18 million facility with our Swiss shareholders to help finance our expansion projects,” Katsande says.

“We are one of the few manufacturing companies still experiencing growth. We know we are the only member of the manufacturing Nec (National Employment Council) which is paying out the wage increase from the recent arbitration award.”

“We know these are desperate times, but our expectation is for government to act to protect the economy especially the few remaining manufacturers. We are asking for clear and courageous leadership on this matter.”

In a telephone interview last night, Katsande confirmed writing to government seeking its intervention before irreparable damage is done to a growing manufacturing business, operating in a country where capacity utilisation is around 40%.

“These issues have been raised by our customers who said there were people peddling cheaper products, which show that these products are being smuggled into the country,” he said.

“Our local suppliers have asked us to reduce our prices and this has put pressure on us to do so. Remember that because of deflation in the economy, we are selling by way of discounts.

“It does not make economic sense to reduce the prices further. It erodes our profitability and just puts more pressure on us.”

He said their exports to Zambia, Malawi, South Africa, Botswana and Namibia were starting to pick up.

“Now, all this is being undermined by government allowing these irregular imports.”

Asked how the trucks were allowed through the borders carrying foodstuffs, which in some cases have been banned to protect local industry and support the land reform programme, Zimra Commissioner-General Gershem Pasi said: “We rely on information given to us. When you give us information we act on it.”

He refused to discuss the smuggling issues.

In October 2009, Nestlé announced it would stop buying milk from Gushungo Dairy Estate — built on a farm which was seized from a white farmer — after coming under pressure from rights activists from South African and Britain who threatened to campaign for a boycott of Nestlé products.

At that time, Nestlé was buying up to a million litres of milk a year from Gushungo. The company, at the end of 2009, shut down its milk processing plant citing safety concerns, after growing harassment and intimidation from groups of Mugabe loyalists, including some government ministers. The groups had been trying to force Nestlé to resume buying milk from Gushungo Dairy.

It only resumed operations in Zimbabwe after assurances from the unity government that the safety of the company staff would be guaranteed.

However, in a brazen challenge to Nestlé, Mugabe launched a range of dairy products under the family’s Alpha Omega brand in 2012.

Nestlé operates a factory in Harare, producing milk powder and cereals for the local market. It has been present in Zimbabwe for over 50 years.