- Tuckshops pose an insatiable challenge to large-scale retailers, creating a highly competitive environment
- Large-scale retailers make substantial financial contributions to the national fiscus, surpassing millions of dollars annually
- Unfortunately, tuckshops, which government is protecting frequently engage in tax evasion practices, resulting in minimal or negligible contributions to the national economy
Harare- In Zimbabwe's struggling economy, where unemployment rates are reported to be as high as 75% according to NGO statistics and around 21% according to ZIMSTAT statistics, the retail industry plays a crucial role in driving economic growth. Government statistics from the 2023 Q3 survey reveal that out of the 8.9 million individuals eligible for employment, only 44.1% are formally employed, resulting in an alarmingly high informal rate of 58.9%.
The services sector, led by retail and trade, contributes over 50% to Zimbabwe's gross domestic product (GDP), making it the largest sector surpassing agriculture, manufacturing, and mining. In the second quarter of 2023, retail and trade accounted for 18.6% of the GDP, which was the largest contribution followed by mining and quarrying. Large retail outlets play a significant role in the national economy by making substantial contributions to the government's revenue through taxes and tariffs. They serve as a crucial pillar of the economy.
However, a concerning issue has emerged due to the mishandling of tuck-shops by the government. This mishandling is now impacting established retail giants despite their significant contributions to the national fiscus. Tuck-shops, commonly known as informal or neighborhood stores, have traditionally operated on a smaller scale, catering to local communities. While their presence has been an integral part of the retail sector's fabric, recent government policies of free import of basic goods, the dishing out of an influx of licenses, exorbitant regulations amid economic decay have inadvertently tilted the playing field in favour of tuck-shops, creating an imbalance that undermines the competitiveness of large retail outlets.
In July 2023, the government, through the finance ministry, implemented a decree that removed import duties on imports. While intended to promote trade and economic growth, this decision had unintended consequences, leading to an influx of cheap goods into the country. The proliferation of inexpensive imported products significantly affected various retailers, including notable sugar companies like Hippo and Star Africa. As a result, supermarkets, which mainly source goods from local producers at higher prices, faces considerable challenges though fierce competition with the informal sector, particularly tuck-shops.
OK Zimbabwe stands as the leading retailer with a nationwide presence of over 70 shops. With its major competitor being Meikles. Other significant ones include TM Pick n Pay, which is a joint venture between TM Pick n Pay South Africa (owning 49%) and Meikles (owning the remaining shares). Additionally, Choppies, Metro Peach, and Brown, along with several other players, also contribute to the competitive landscape.
Formal retailers in Zimbabwe face various financial burdens and regulatory obligations. They are subject to a corporate tax rate of approximately 25% and have to pay IMMT taxes, rent, and employee wages. Additionally, they are required to surrender 15% of their earnings to the Reserve Bank of Zimbabwe (RBZ) in exchange for Zimbabwe dollars. These retailers also bear the burden of excise duties on imports. They are obligated to comply with regulations that dictate the pricing of products using the Zimbabwe dollar's formal market rate. However, the official rate tends to be overrated compared to the rates on parallel market. As a result, formal retailers are compelled to charge higher prices in US dollars based on the formal market rate, while tuck-shops, which operate using the parallel market rate, can offer products at lower prices.
This discrepancy in pricing creates a situation where formal retailers' products become more expensive compared to those offered by tuckshops. Tuckshops, being non-formal players, often evade tax payments and other regulatory requirements, allowing them to operate with lower costs. This imbalance in cost structures puts formal retailers at a disadvantage, leading to increased competition and potentially driving them out of the market.
Its overwhelming dominance poses a severe threat to the formal retail sector, while the government remains largely silent on the issue. In fact, the formal retail sector is unlikely to receive any significant support, as the government has indicated that it expects the sector to resolve its problems independently. This stance from the government is deeply concerning, particularly for investors who contribute significantly to the national fiscus through tax contributions.
Metro Peech & Browne, one of Zimbabwe's largest wholesalers, is currently under corporate rescue. In addition to issues of poor corporate governance, the company has cited competition from the informal sector as a contributing factor to its financial troubles. This competition is not bound by the same regulatory compliance requirements and can operate with lower overhead costs. Choppies and Pick n Pay, have also experienced challenges in Zimbabwe. Choppies recently closed one of its branches in Harare due to rental issues, and in their financial reports, they mentioned that Zimbabwean consumers have shifted towards smaller stores operated by the informal sector. The smaller outlets are able to offer lower prices due to their lower overhead costs. Pick n Pay has seen a decline in earnings in Zimbabwe, primarily due to inflation and exchange losses. OK Zimbabwe, a rival of Pick n Pay, has described this situation as the "forced death of large-scale retailers."
It is essential to recognize that the problems faced by retailers in Zimbabwe are primarily caused by the government's actions and policies, rather than being solely the retailers' responsibility. The government's failure to address exchange rate volatility and establish currency stability has had a detrimental impact on the retail sector. The rapid depreciation of the local currency has resulted in products priced in Zimbabwe dollars becoming excessively expensive for consumers. To mitigate potential losses, retailers have resorted to forward pricing their products making them expensive even in local currency terms. However, when considering prices in US dollars, the formal market rate mandated by Statutory Instrument 127 of 2021, which is overvalued, makes the situation even more challenging. As a consequence, customers tend to avoid large-scale retailers due to the significantly higher prices.
The availability of free imports has disproportionately benefited tuck-shops, like said. This dynamic further diminishes sales for large retailers and deprives them of foreign currency, as tuck-shops can offer imported goods at discounted prices. Retailers are required to surrender 15% of their local USD sales to the government, exacerbating their losses.
Tuckshops offer cost advantages over large supermarkets due to their reduced overhead expenses. Operating from smaller premises and requiring fewer staff members, tuckshops can minimize their operational costs and subsequently pass on the savings to customers. Furthermore, tuckshops often procure their products directly from wholesalers, eliminating intermediaries and further reducing expenses. The personalized nature of tuckshops enables them to be flexible in pricing and willing to negotiate with customers, resulting in improved deals, particularly for bulk purchases or regular customers. These factors collectively contribute to the affordability of tuckshops, making them an appealing choice for budget-conscious consumers.
With this in view, Finance ministry permanent-secretary, George Guvamatanga said tuckshops have no negative impact on formal retailers, insisting that managers in most formal businesses were failing to respond to the changing economic dynamics, highest level of incompetence. This is clear hypocrisy as the exchange rate, which has resulted in sustained disparities between formal and parallel market rates is the very same reason why goods in supermarkets are very expensive, while the informal sector is competitive because they do not abide by the government-pegged exchange rate.
Formal businesses meet massive compliance hurdles ranging from tax compliance, Nssa, Aids levy, heavy rentals, payment of salaries governed by Nec, while the informal sector evades most of these costs. Exchange rate spikes and chronic inflation has resulted in erosion of capital and cash flows for the formal businesses. The informal sector can beat this challenge by solely selling in United States dollars but formal businesses cannot do the same because of the need to comply with the laws.
The informal sector has the advantage of being able to operate a lucrative business with minimal resources, such as a garage and a small number of employees. This efficiency is not easily replicated by formal retailers due to the stark differences in their operating models. Formal retailers are bound by government regulations, city and town bylaws, and tax obligations enforced by the Zimbabwe Revenue Authority (ZIMRA). On the other hand, informal sector businesses often operate outside the purview of these regulations and do not comply with tax requirements.
It is important to recognize that the formal sector cannot simply adopt the practices of the informal sector. Instead, what is needed is an efficient exchange rate system and protection for formal players. Formal retailers are part of complex value chains that support numerous jobs. Their tax contributions are substantial, and it is crucial for the government to address their concerns seriously and consider the impact on those employed by these retailers.
Informalizing their operations would amount to tax evasion for formal retailers, which is not a viable solution. Instead, the focus should be on creating an environment that supports the formal sector, ensures fair competition, and provides appropriate protection for businesses that comply with regulations and contribute significantly to tax revenues and job creation.
Earlier this year, Finance Minister Professor Mthuli Ncube highlighted that the government was experiencing a loss of approximately 25 percent of revenue collections due to the growing informal sector. In this context, it is not the responsibility of formal retailers to adapt their operations, but rather the government's responsibility to assess the policies that contribute to the decline in formal retail businesses. Additionally, efforts should be made to formalize the informal market.
There is no justification for the Government to provide support to the informal sector. However, the Government should focus on creating a conducive operational environment that allows for maximum revenue collection. It is necessary for the Government to promote the formalization of all businesses in the country and ensure tax compliance, as an informal sector can impose significant burdens on the economy. The Retailers Association of Zimbabwe (RAZ), representing major retailers such as OK Zimbabwe and Pick n Pay, has observed a decline in the sector's contribution to Government revenue. Previously, the sector contributed over 20 percent through value-added tax (VAT) and other forms of remittances. This decline can be attributed to reduced volumes within formal retailers.
To address the issue, the government should evaluate the policies and regulations that hinder the growth and competitiveness of formal retailers. This may involve reducing bureaucratic barriers, streamlining taxation processes, and creating a favourable business environment for formal retailers to thrive. By doing so, formal retailers will have better opportunities to compete with the informal sector and contribute to the government's revenue collection. There is also a need to formalise the informal sector given for the country to benefit through taxation, which they usually evade. The retail sector is one of the leading to this year’s earnings given a plunge in commodity prices amid surging costs.
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