The impact of the economic environment in zimbabwe on the business activities of nestlé under the period of 2000 – 2010

Thanks to the increasing connection between countries, people have the opportunity to interact with hundreds of cultures, to be immersed in many economic and legal backgrounds. Globalization also creates an impetus for domestic businesses to go global, becoming multinational companies with worldwide coverage. However, globalization itself also makes more obvious the differences in the business environment of countries around the world. If multinational enterprises want to confirm their presence in a foreign countrys market, it is necessary for them to know how to adapt to many differences in that market. Zimbabwe has been considered as a market with significant challenges and fluctuations in its economic growth over the years. Especially in the period of 2000 to 2010, the country faced a severe economic crisis marked by hyperinflation, poverty and other societal issues. The government played a key role in improving the nation’s economy through several economic reforms such as the Fast Track Land Reform Programme in 2000 and Indigenisation policy in 2007. This entailed numerous new regulations and therefore, posed a major threat to the way foreign companies, especially Nestlé, did business in the local market. Being aware of the differences of the economic environment in Zimbabwe on international businesses of Nestlé, our group has decided to analyze the topic of “The impact of the economic environment in Zimbabwe on the business activities of Nestlé under the period of 2000 – 2010”. The report is structured as follows: Chapter 1: Overview of Nestlé Chapter 2: The impact of the economic environment in Zimbabwe on the business activities of Nestlé under the period of 2000 2010 The group would like to thank Ph.D Nguyen Hong Hanh for your dedication and support. With limited knowledge and time allowance, our report cannot be free from mistakes. We hope that you can give our report valuable feedback for better improvement.

FOREIGN TRADE UNIVERSITY SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS

-000 -MIDTERM ASSIGNMENT THE IMPACT OF THE ECONOMIC ENVIRONMENT IN

ZIMBABWE ON THE BUSINESS ACTIVITIES OF NESTLE UNDER

THE PERIOD OF 2000 - 2010

Group: Group Class code: KDOE307 Lecturer: Ph.D Nguyen Hong Hanh

Hanoi, May 2023

TABLE OF CONTENTS

TABLE OF FIGURES 2

FIGURES 2

LIST OF ABBREVIATIONS 2

INTRODUCTION 3

CHAPTER 1: OVERVIEW OF NESTLÉ 4

1.1 General information 4

1.2 The history and development of Nestlé in Zimbabwe during 2000-2010 6

CHAPTER 2: THE IMPACT OF THE ECONOMIC ENVIRONMENT IN ZIMBABWE ON THE BUSINESS ACTIVITIES OF NESTLÉ UNDER THE PERIOD OF 2000 - 2010 7 2.1 The economy of Zimbabwe under the period of 2000 - 2010 7

2.1.1 Overview of the economy of Zimbabwe under the period of 2000 - 2010 7

2.1.2 The impact of the economy of Zimbabwe on Nestlé under the period of 2000 - 2010 11

2.1.3 Adaptation strategies adopted by Nestlé 12

2.2 Notable governmental reform policies under the period of 2000 - 2010 12

2.2.1 Fast Track Land Reform Programme (FTLRP) in 2000 12

2.2.1.1 Overview of FTLRP 12

2.2.1.2 The impact of Zimbabwe's Fast Track Land Reform Programme (FTLRP) on its economic situation 13 2.2.1.3 The impact of the Fast track land reform programme (FTLRP) on Nestlé 14

2.2.1.4 Adaptation strategies adopted by Nestlé 16

2.2.2 Indigenisation policy in 2007 18

2.2.2.1 Overview of indigenisation policy in 2007 18

2.2.2.2 The impact of Zimbabwe's indigenisation policy in 2007 on its economic situation 18

2.2.2.3 The impact of indigenisation policy in 2007 on Nestlé 22

2.2.2.4 Adaptation strategies adopted by Nestlé 24

CONCLUSION 25

REFERENCES 26

TABLE OF FIGURES

TABLES Table 1 Zimbabwe economic indicators in 2000, 2005 and 2010 (Source: World Bank) 7 Table 2 Zimbabwe GDP, PPP and GDP per capita at PPP from 2000 to 2010 9 Table 3 The economy of Zimbabwe in 2000 and 2003 13 Table 4 Percentage of raw materials that Nestlé Zimbabwe sourced locally in 1999 and 2003 15 Table 5 Import of Nestlé Zimbabwe before and after the FTLRP 17 Table 6 Zimbabwe’s Hyperinflation from August 2007 – July 2008 22

FIGURES Figure 1: Underlying trading operating profit by operating segment 4 Figure 2: Real GDP Growth rates in Africa 2003 5 Figure 3: Sector structure of Zimbabwe in 2000 and 2010 10 Figure 4: Net inflows of FDI in comparison with the GDP of Zimbabwe from 2000 to 2008 19 Figure 5: Annual GDP growth of Zimbabwe in nine years from 2000 - 2008 20

LIST OF ABBREVIATIONS

ESAR East and Southern Africa Region

SADC Southern African Development Community

FTLRP Fast Track Land Reform Programme

LRRP II Land Reform and Resettlement Programme Phase II

ZANU – PF The Zimbabwe African National Union – Patriotic Fron

Thanks to the increasing connection between countries, people have the opportunity tointeract with hundreds of cultures, to be immersed in many economic and legal backgrounds.Globalization also creates an impetus for domestic businesses to go global, becomingmultinational companies with worldwide coverage

However, globalization itself also makes more obvious the differences in the businessenvironment of countries around the world If multinational enterprises want to confirm theirpresence in a foreign country's market, it is necessary for them to know how to adapt to manydifferences in that market

Zimbabwe has been considered as a market with significant challenges and fluctuations

in its economic growth over the years Especially in the period of 2000 to 2010, the countryfaced a severe economic crisis marked by hyperinflation, poverty and other societal issues Thegovernment played a key role in improving the nation’s economy through several economicreforms such as the Fast Track Land Reform Programme in 2000 and Indigenisation policy in

2007 This entailed numerous new regulations and therefore, posed a major threat to the wayforeign companies, especially Nestlé, did business in the local market

Being aware of the differences of the economic environment in Zimbabwe oninternational businesses of Nestlé, our group has decided to analyze the topic of “The impact ofthe economic environment in Zimbabwe on the business activities of Nestlé under the period of

2000 – 2010” The report is structured as follows:

Chapter 1: Overview of Nestlé

Chapter 2: The impact of the economic environment in Zimbabwe on the business activities ofNestlé under the period of 2000 - 2010

The group would like to thank Ph.D Nguyen Hong Hanh for your dedication and support.With limited knowledge and time allowance, our report cannot be free from mistakes We hopethat you can give our report valuable feedback for better improvement

CHAPTER 1: OVERVIEW OF NESTLÉ

1.1 General information

Nestlé has been a well-known multinational food and drink processing corporationworldwide with over 150 years of expertise in nutrition, health and wellness At the end of 2022,Forbes published a chart which ranked Nestlé as the world’s largest food and beverage company.This is evident by the fact that this conglomerate has 2000 brands, among which several bignames are Kitkat, Nescafe, Milo, and Nestea and in fact, 31 brands constitute billionaire Nestléalso produces 7 product categories including powered liquid and beverages, petcare, nutritionand health science, prepared dishes and cooking aids, confectionery, water, milk products and icecream They are produced from 344 factories in 77 countries and then appear in the market of

188 nations

Nestlé’s purpose is directly reflected in its slogan which is “Good food, good life” Thismeans the company always strives for providing products that can enhance the quality of life,which is accomplished by shaping consumers’ habits and inspiring them to lead a healthierlifestyle Similarly, Nestlé’s approach of doing business has been consented to be “CreatingShared Value” since 2006, which guides the company to long-run success by combining worldresources with local know-how in order to generate value for the society as a whole and forshareholders

Figure 1: Underlying trading operating profit by operating segment

Source: Nestlé Annual Report, 2022

All of these aforementioned aims are closely associated with Nestlé’s choice to choose itsmarket In fact, Nestlé classifies its market into 5 zones: North America, Latin America, Europe,Greater China and Asia, Oceania, Africa As shown in Figure 1, all of these areas generate acomparatively equal proportion of sales, with the share of the AOA zone (Asia, Oceania, Africa)being the highest This is especially intriguing for the reason that while a number of companieshave failed in Africa in particular, Nestlé still has a reputation there for decades In fact, anarticle from Businessday, a national daily newspaper in South Africa, has revealed that 80% ofbusinesses in Africa fail within five years of establishment due to harsh economic environments,poor business practices, and little access to capital.

The question is why a large corporation like Nestlé, having known the hardship possiblyencountered in Africa, still makes a decision to invest in the area In its 2005 report, Nestlépointed out that Africa had hidden economic development with a stable macroeconomy withincreasing rates of GDP (As shown in Figure 2) and stable inflation rate which signified a healthyand growing economy Another important justification is that Nestlé places huge importance onsocial benefits, and Africa is an ideal destination for Nestlé to accomplish its goal which is topromote a better lifestyle To further illustrate this point, in 2004, Nestlé even contributed largely

to hampering the HIV/AIDS outbreak in Africa

Figure 2: Real GDP Growth rates in Africa 2003

Source: ECA

1.2 The history and development of Nestlé in Zimbabwe during 2000-2010

Nestlé has been present in Zimbabwe since 1959 and this market has played a strategicrole as part of the Nestlé East and Southern Africa Region (ESAR), a grouping of 23 countries.From 1960 to 2000, Nestlé Zimbabwe has invested substantially to expand and modernize itsoperations with a view to improving the product quality, roll out new items, and improve theefficiencies of its operations

Before 2008, Nestlé relied on getting supplies from contracted dairy farmers inZimbabwe However, the occurrence of some new programmes and policies in Zimbabwe from

2000 to 2010 caused huge changes in Nestlé business activities here Many local farmers run out

of business and thus, Nestlé lacks supplies seriously In 2009, Nestlé shut down the operations inZimbabwe but then reopened in the next year Until today, Nestlé Harare factory in Zimbabweproduces a wide range of products which are both for the local market as well as exports into theSADC region

There are several underlying reasons why our group chose Nestlé and Zimbabwe for ourpaper First of all, during 2000-2010, Zimbabwe received a significant amount of investment inbuilding a factory from Nestlé, indicating that this nation was among important markets of thecompany in Africa Specifically, in the year 2010, Nestlé announced an investment of CHF 150million into constructing three new factories in Equatorial Africa and extending existing ones,among which there was an amount of CHF 25 million allocated to upgrade its Harare factory inZimbabwe

Secondly, Zimbabwe has been established in Zimbabwe for over 60 years, which meansthat it has experienced several economic periods in this nation The most notable event in theperiod of 2000-2010 was the land reform programme in 2000 and the indigenisation policy in

2007 Data from Nestlé in Chart 2 also shows that in 2003, Zimbabwe had negative GDP growthrates, at nearly -12% and this number was the lowest of all surveyed African countries.Nevertheless, Nestlé still tried to maintain its business activities and adapt to the situation, which

is later clarified in the paper Thanks to those proper adaptations, Nestlé has gained its place inZimbabwe until now Therefore, the business activities of Nestlé in Zimbabwe during 2000-2010

is worth investigating into

CHAPTER 2: THE IMPACT OF THE ECONOMIC ENVIRONMENT IN ZIMBABWE ON THE BUSINESS ACTIVITIES OF NESTLÉ UNDER THE PERIOD OF

2000 - 2010 2.1 The economy of Zimbabwe under the period of 2000 - 2010

2.1.1 Overview of the economy of Zimbabwe under the period of 2000 - 2010

a Economic system

From 2000 to 2010, Zimbabwe underwent a notable economic transformation Previouslycharacterized by a mixed economy with market-driven policies, private ownership, andgovernment interventions, the country shifted towards a more controlled and interventionistsystem This change was primarily driven by the government's land reform policies andindigenisation programs The land reform aimed to redistribute agricultural land frompredominantly white farmers to landless black Zimbabweans, leading to a significant shift inland ownership and control with increased government involvement Additionally, theindigenisation programs mandated that sectors like mining, manufacturing, banking, andtelecommunications allocate at least 51% ownership to indigenous Zimbabweans, aiming toaddress historical imbalances and promote inclusive economic growth

Table 1 Zimbabwe economic indicators in 2000, 2005 and 2010

Source: World Bank

Over the course of the decade, Zimbabwe experienced a significant decline in its GDPper capita, with the figure in 2010 reaching only a third of the 2000 value Similarly, thecountry's Human Development Index (HDI) witnessed a decline from a medium level of humandevelopment to a low level Furthermore, both poverty rates and unemployment rates showedsubstantial increases during this period

The indicators collectively indicate a challenging economic situation in Zimbabwe,impeding the country's progress towards higher stages of development and keeping it classified

as a developing nation Several factors contributed to these challenges:

Firstly, the land reform program initiated in 2000 led to the expropriation of white-ownedfarms, causing a decline in agricultural production This had widespread adverse effects on thecountry's overall economic stability, affecting employment, export revenues, and food security

Secondly, the land reform program coincided with a period of political instabilitytriggered by the disputed 2008 presidential election The resulting power-sharing agreementhindered economic growth, discouraged foreign investment, and affected the country's reputation

as a reliable investment destination

Thirdly, Zimbabwe experienced severe hyperinflation in 2008, eroding the value of thelocal currency and causing significant challenges for businesses and individuals in accessinggoods and services

Furthermore, the implementation of the indigenisation program was implemented, aiming

to promote economic empowerment by transferring ownership and control of businesses toindigenous Zimbabweans However, concerns were raised about its impact on business growthand access to resources, potentially affecting job creation and overall economic development

c National economic output

From 2000 to 2010, Zimbabwe faced significant challenges in national economic output

Year GDP (million USD) PPP (million USD) GDP per capita (USD)

2009 4,308 11,583 1,130

Table 2 Zimbabwe GDP, PPP and GDP per capita at PPP from 2000 to 2010

Source: World Bank

Over the analyzed period, Zimbabwe experienced a decline in its GDP figures byapproximately 33%, indicating a contraction in the country's overall economic output Similarly,there was a decline in Zimbabwe's PPP by around 6.3% over the years, reflecting a decrease inthe relative purchasing power of the country's currency Additionally, the GDP per capitaconsistently decreased by about 10.4% over the years, highlighting a decline in average incomeand living standards for the population These figures collectively indicate economic difficultiesand pose challenges in providing sustainable livelihoods and improving the well-being ofindividuals in Zimbabwe The decline in GDP, PPP, and GDP per capita suggests obstacles insustaining economic growth and development, as well as potential inflationary pressures andeconomic instability

In comparison to its neighboring countries, Zimbabwe witnessed a deterioratingeconomic situation between 2000 and 2010 This stands in contrast to the moderate GDP growthobserved in Mozambique (approximately 4.6%), significant growth in Zambia (approximately23.5%), and relatively robust growth in Botswana (approximately 22.4%) These figures indicatethat Zimbabwe's economic decline can be attributed to a combination of internal factors such asgovernment intervention in the economy, political instability, policy decisions, externaleconomic shocks, and underlying structural challenges

d Sector structure

Figure 3: Sector structure of Zimbabwe in 2000 and 2010

Source: The World Bank

● Agriculture sector

During the period of 2000-2010, Zimbabwe's agricultural sector played a vital role in thecountry's economy, making significant contributions to GDP, employment, and foreign exchangeearnings The agricultural sector represented approximately 20% of Zimbabwe's GDP, making it

a crucial component of the economy It also served as a major source of employment, witharound 60% of the workforce engaged in agricultural activities

Furthermore, the agricultural sector was a significant contributor to Zimbabwe's exportearnings, accounting for approximately 40% of the country's total exports Key agriculturalproducts during this period included maize, tobacco, cotton, and wheat These commodities wereimportant for both domestic consumption and foreign trade, providing essential food suppliesand generating foreign exchange revenue

● Manufacturing sector

The manufacturing sector accounted for approximately 13% of Zimbabwe's GDP.However, challenges such as power shortages, inadequate infrastructure, and limited access tocapital had a detrimental impact on the sector's productivity and competitiveness Additionally,the economic crisis and hyperinflation exacerbated the difficulties faced by the manufacturingsector, leading to the closure of factories and a loss of jobs

e Foreign trade

● Foreign trade

During 2000-2010, Zimbabwe's foreign trade witnessed a decline in exports and anincrease in imports, resulting in a widening trade deficit The value of exports decreased fromUS$1.6 billion in 2000 to US$354 million in 2010, while the value of imports rose from US$2.0billion in 2000 to US$4.0 billion in 2010 This decline in exports and increase in imports can beattributed to various factors, including the government's land reform program, which adverselyaffected the agricultural sector, and the hyperinflation that ensued Additionally, the economiccrisis in Zimbabwe led to a decline in domestic production and a greater reliance on importedgoods.

● Exchange rate

During 2000-2010, Zimbabwe experienced hyperinflation, leading to a severe economiccrisis The exchange rate of the Zimbabwean dollar (ZWD) depreciated drastically against othercurrencies In 2000, 1 USD was equivalent to 50 ZWD, but by 2008, the exchange rate hadescalated to 250 million ZWD to 1 USD To stabilize the economy and address hyperinflation,the government of Zimbabwe abandoned the Zimbabwean dollar in 2009 and adopted the USdollar as the official currency

2.1.2 The impact of the economy of Zimbabwe on Nestlé under the period of 2000 - 2010

During the period of 2000-2010, the economy of Zimbabwe had a significant impact onNestlé With its mixed economy and high level of government control, the government ofZimbabwe exercised substantial control over the economy, imposing restrictions on privateownership, investment, and business operations (Gov.uk, 2022) Nestlé was no exception Oneexample of this was the implementation of the Indigensation policy, which required localownership in certain sectors, including the food and beverage industry The challenges thispolicy posed on Nestlé will be further illustrated in the next part Moreover, the government'snationalization and forced policy measures resulted in fragile property rights, making it difficultfor companies like Nestlé to protect their assets and investments Property registrationprocedures in Zimbabwe were notoriously difficult, with costs amounting to 21% of the propertyvalue in 2006 (Doing Business Annual Report, 2006) These factors combined made the businessenvironment challenging for Nestlé, as the company had to navigate uncertain ownershipstructures and face obstacles in registering and protecting its properties

Hyperinflation, exchange rate instability, and currency challenges also seemed to wreakhavoc on Nestlé and other foreign businesses operating in the country during the period.Hyperinflation eroded the value of the Zimbabwean dollar, making it difficult for companies toconduct transactions, accurately price their products, and plan for the future The exchange rateand currency instability further compounded these challenges Foreign businesses, includingNestlé, had to navigate the gap between the official exchange rate and the parallel market rate,which increased the risk of arbitrage Businesses had to resort to paying overseas suppliers andrepatriating profits through the foreign currency auction system, which introduced additional

bureaucratic processes (Gov.UK, 2022) These economic conditions made it challenging forNestlé to effectively manage its financial operations, leading to increased risks and uncertainties

in conducting business in Zimbabwe during that period

2.1.3 Adaptation strategies adopted by Nestlé

Despite these challenges, Nestlé continued to operate in Zimbabwe during the period of2000-2010, and in fact increased its investment in the country in some areas For example, Nestléinvested in a new coffee processing plant in Zimbabwe in 2010, indicating a continuedcommitment to the country despite the challenges Nestlé invested in building or improvinginfrastructure in order to support its operations effectively This could involve constructingmanufacturing facilities, warehouses, or investing in utilities like water and power supply

Nestlé could boost its operation in Zimbabwe by engaging with local stakeholders,including government officials and community leaders This aimed to better understand the localcontext and navigate the political and economic environment The company sought to buildpositive relationships with local partners and stakeholders to create a more stable operatingenvironment Moreover, Nestlé also expected to gain more freedom in doing business once thisrelationship was firmly established

Moreover, to mitigate the effects of hyperinflation, Nestlé, like other companies, had toimplement price adjustments and frequently revise them to keep up with inflation rates.Companies also resorted to importing goods directly or using alternative currencies fortransactions, such as the U.S dollar or the South African rand, to minimize the impact ofhyperinflation

2.2 Notable governmental reform policies under the period of 2000 - 2010

2.2.1 Fast Track Land Reform Programme (FTLRP) in 2000

2.2.1.1 Overview of FTLRP

Before the implementation of the FTLRP, Zimbabwe had a significant disparity in thedistribution of land In 1980, during the country's independence, there were 33 million hectares(Ha) of arable farming land in Zimbabwe Out of this land, 45% (11 million Ha), whichconsisted of the most fertile land, was owned by 6,000 white commercial farmers The remaining5% of land in the drier regions was controlled by 8,500 mainly small black commercial farmers.The poorest and infertile land in the communal areas, making up 50%, was occupied by 700,000black families This unequal distribution was a result of the country's British colonial history,where large tracts of land were given to white settlers (Tapiwa M Mabaye, 2005)

This land situation remained unchanged from 1890 to 1990, followed by attempts of thegovernment to implement land reform programs like the Land Reform and ResettlementProgramme Phase II (LRRP II), which were largely unsuccessful Then, starting in 2000, war

veterans from the Chimurenga war led landless black individuals to invade 1,000 farms and seizeland owned by white farmers without any government interference However, these new settlerslacked knowledge or training in commercial farming, particularly on a large scale They alsolacked the necessary capital to purchase essential inputs like tractors, fertilizers, seeds, and otherexpensive resources Consequently, the farms operated inefficiently (Tapiwa M Mabaye, 2005).

This situation compelled the government to take action In July 2000, the Zimbabweangovernment officially announced the Fast Track Land Reform Programme (FTLRP), which waslaunched in April 2001 The FTLRP aimed to acquire "not less than 8.3 million hectares from thelarge-scale commercial farming sector" (Human Right Watch, 2002) owned by whitecommercial farmers and redistribute it to poor and middle-income landless black Zimbabweans.Additionally, the program aimed to resettle the individuals who had forcefully occupied farmsbut lacked the necessary skills to effectively manage those farms (Tapiwa M Mabaye, 2005)

2.2.1.2 The impact of Zimbabwe's Fast Track Land Reform Programme (FTLRP)

on its economic situation

The implementation of the FTLRP had a profoundly detrimental effect on Zimbabwe'seconomy, as manifested by a conspicuous decline in GDP, agriculture contribution in GDP, aswell as exports during the 2000-2003 period

Table 3 The economy of Zimbabwe in 2000 and 2003

Source: The World Bank

Agriculture production was one of the most heavily affected sectors of the economy By

2004, it had dropped by 30% compared to 2000 (Richardson, 2004) The major crops were quiteheavily affected, particularly those produced by large-scale white farmers The 4 main field crops(wheat, tobacco, soybeans and sunflower) experienced both reduced area plantings and outputvolumes (a decrease of 30-70%) (San Moyo, 2004) Particularly, wheat production recorded adrop

from 324,000 metric tonnes (MT) in 2000 to 122,000 MT in 2004, then hit bottom in 2008 withonly 35,000 MT (IndexMundi, 2022).

Regarding milk production, the land reform programme disrupted large-scale dairyoperations responsible for more than 95% of the national milk pool (Kagoro and Chatiza, 2012).This programme was probably the most important factor that negatively impacted the dairysector (Mzumara, 2012; Marecha, 2013) The difficult operational conditions created by theFTLRP resulted in a reduction in milk yield from 262 million liters in 1990 to below 37 millionliters in 2009 (Dairy Services, 2020)

During this period, sugar production was also performed generally ineffective with thetransferring of commercial sugarcane farms to black farmers Sugar production saw a deepdecline from nearly 550,000 MT in 2000 to less than 450,000 MT in 2004 The figure even fell

to its lowest level of below 250,000 MT in 2009 (Zimbabwe Sugar Annual, 2022)

The land reform programme also had an adverse effect on agricultural retailing This isdue to decreasing sales of agricultural retailing from 1997 to 2013 (Munyoro, 2013), increasingprices of agricultural inputs as noted by Derman (2006) The revenue reduction for the farmeralso consequently affected sales and revenue for the agricultural retailing sector (BusinessTribune, 2004)

2.2.1.3 The impact of the Fast track land reform programme (FTLRP) on Nestlé

a Supply chain disruption

The first prominent impact of the FTLRP was on Nestlé’s supply chain This was reflected

in the availability of raw materials and the quality of the products In 1999, Nestlé Zimbabwe'ssupply chain in Zimbabwe primarily involved sourcing raw materials locally, such as milk,wheat, sugar, coffee and cocoa