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 FIGURES LIST OF ABBREVIATIONS .2 INTRODUCTION .3 CHAPTER 1: OVERVIEW OF NESTLÉ 1.1 General information 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 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 .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 Zimbabwe economic indicators in 2000, 2005 and 2010 (Source: World Bank) Table Zimbabwe GDP, PPP and GDP per capita at PPP from 2000 to 2010 Table The economy of Zimbabwe in 2000 and 2003 .13 Table Percentage of raw materials that Nestlé Zimbabwe sourced locally in 1999 and 2003 15 Table Import of Nestlé Zimbabwe before and after the FTLRP .17 Table Zimbabwe’s Hyperinflation from August 2007 – July 2008 22 FIGURES Figure 1: Underlying trading operating profit by operating segment Figure 2: Real GDP Growth rates in Africa 2003 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 ESAR LIST OF ABBREVIATIONS East and Southern Africa Region SADC Southern African Development Community HDI Human Development Index PPP Purchasing Power Parity FTLRP Fast Track Land Reform Programme LRRP II Land Reform and Resettlement Programme Phase II MDC Movement for Democratic Change ZANU – PF The Zimbabwe African National Union – Patriotic Fron INTRODUCTION 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 country's 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 CHAPTER 1: OVERVIEW OF NESTLÉ 1.1 General information Nestlé has been a well-known multinational food and drink processing corporation worldwide 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 big names are Kitkat, Nescafe, Milo, and Nestea and in fact, 31 brands constitute billionaire Nestlé also produces product categories including powered liquid and beverages, petcare, nutrition and health science, prepared dishes and cooking aids, confectionery, water, milk products and ice cream 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” This means 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 healthier lifestyle Similarly, Nestlé’s approach of doing business has been consented to be “Creating Shared Value” since 2006, which guides the company to long-run success by combining world resources with local know-how in order to generate value for the society as a whole and for shareholders 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 its market In fact, Nestlé classifies its market into zones: North America, Latin America, Europe, Greater China and Asia, Oceania, Africa As shown in Figure 1, all of these areas generate a comparatively 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 companies have failed in Africa in particular, Nestlé still has a reputation there for decades In fact, an article from Businessday, a national daily newspaper in South Africa, has revealed that 80% of businesses 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 possibly encountered in Africa, still makes a decision to invest in the area In its 2005 report, Nestlé pointed out that Africa had hidden economic development with a stable macroeconomy with increasing rates of GDP (As shown in Figure 2) and stable inflation rate which signified a healthy and growing economy Another important justification is that Nestlé places huge importance on social benefits, and Africa is an ideal destination for Nestlé to accomplish its goal which is to promote 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 strategic role 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 its operations with a view to improving the product quality, roll out new items, and improve the efficiencies of its operations Before 2008, Nestlé relied on getting supplies from contracted dairy farmers in Zimbabwe 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 in Zimbabwe but then reopened in the next year Until today, Nestlé Harare factory in Zimbabwe produces a wide range of products which are both for the local market as well as exports into the SADC region There are several underlying reasons why our group chose Nestlé and Zimbabwe for our paper First of all, during 2000-2010, Zimbabwe received a significant amount of investment in building a factory from Nestlé, indicating that this nation was among important markets of the company in Africa Specifically, in the year 2010, Nestlé announced an investment of CHF 150 million 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 in Zimbabwe Secondly, Zimbabwe has been established in Zimbabwe for over 60 years, which means that it has experienced several economic periods in this nation The most notable event in the period of 2000-2010 was the land reform programme in 2000 and the indigenisation policy in 2007 Data from Nestlé in Chart also shows that in 2003, Zimbabwe had negative GDP growth rates, 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 in Zimbabwe 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 Previously characterized by a mixed economy with market-driven policies, private ownership, and government interventions, the country shifted towards a more controlled and interventionist system This change was primarily driven by the government's land reform policies and indigenisation programs The land reform aimed to redistribute agricultural land from predominantly white farmers to landless black Zimbabweans, leading to a significant shift in land ownership and control with increased government involvement Additionally, the indigenisation programs mandated that sectors like mining, manufacturing, banking, and telecommunications allocate at least 51% ownership to indigenous Zimbabweans, aiming to address historical imbalances and promote inclusive economic growth b Stage of development During the period from 2000 to 2010, Zimbabwe was considered to be a developing country Indicator 2000 2005 2010 GDP per capita (nominal) $3,600 $1,600 $1,200 HDI 0.551 0.509 0.477 Poverty Rates 55% 70% 75% Unemployment Rate 50% 70% 80% Table Zimbabwe economic indicators in 2000, 2005 and 2010 Source: World Bank Over the course of the decade, Zimbabwe experienced a significant decline in its GDP per capita, with the figure in 2010 reaching only a third of the 2000 value Similarly, the country's Human Development Index (HDI) witnessed a decline from a medium level of human development to a low level Furthermore, both poverty rates and unemployment rates showed substantial 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-owned farms, causing a decline in agricultural production This had widespread adverse effects on the country's overall economic stability, affecting employment, export revenues, and food security Secondly, the land reform program coincided with a period of political instability triggered by the disputed 2008 presidential election The resulting power-sharing agreement hindered 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 the local currency and causing significant challenges for businesses and individuals in accessing goods and services Furthermore, the implementation of the indigenisation program was implemented, aiming to promote economic empowerment by transferring ownership and control of businesses to indigenous Zimbabweans However, concerns were raised about its impact on business growth and 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) 2000 6,153 12,276 1,247 2001 5,948 12,199 1,234 2002 5,743 12,122 1,221 2003 5,538 12,045 1,208 2004 5,333 11,968 1,195 2005 5,128 11,891 1,182 2006 4,923 11,814 1,169 2007 4,718 11,737 1,156 2008 4,513 11,660 1,143 2009 4,308 11,583 1,130 2010 4,103 11,506 1,117 Table 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 by approximately 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 in the relative purchasing power of the country's currency Additionally, the GDP per capita consistently decreased by about 10.4% over the years, highlighting a decline in average income and living standards for the population These figures collectively indicate economic difficulties and pose challenges in providing sustainable livelihoods and improving the well-being of individuals in Zimbabwe The decline in GDP, PPP, and GDP per capita suggests obstacles in sustaining economic growth and development, as well as potential inflationary pressures and economic instability In comparison to its neighboring countries, Zimbabwe witnessed a deteriorating economic situation between 2000 and 2010 This stands in contrast to the moderate GDP growth observed in Mozambique (approximately 4.6%), significant growth in Zambia (approximately 23.5%), and relatively robust growth in Botswana (approximately 22.4%) These figures indicate that Zimbabwe's economic decline can be attributed to a combination of internal factors such as government intervention in the economy, political instability, policy decisions, external economic shocks, and underlying structural challenges d Sector structure imported milk powder led to increased expenditures and reduced profit margins, making competitive pricing a challenge The land reform program and economic challenges like hyperinflation and currency devaluation further raised operating costs for businesses, including Nestlé, influencing product prices Disruptions to established supply chains and distribution networks introduced logistical hurdles, causing delays, increased transportation costs, and difficulties in procuring raw materials, all contributing to higher production costs and product prices According to a report by the Zimbabwe Congress of Trade Unions, Nestlé product prices rose by 50% between 2000 and 2007, attributed to supply chain disruptions and increased operational costs e Reduced Revenue The FTLRP also seemed to lead to a reduction in the company’s revenue The aforementioned drop in Zimbabwe’s exports also played a part in the recorded decrease in Zimbabwe Nestlé’s decrease in export According to Nestlé Zimbabwe's 2000 annual report, exports accounted for 50% of the company's revenue However, by 2007, the figure fell to only 25% of the company's revenue With a huge drop in agriculture main crops, the disruption in supply chain and a steep decline in export, in 2007, the total revenue of the company decreased by 50% compared to 2000 (ZIMSTAT, 2007) f Investment uncertainty The land reform program created a sense of uncertainty and instability in the business environment Changes in land tenure, property rights, and political and social tensions followed after the land reform affected Zimbabwe Nestlé's ability to plan and make long-term investment decisions This was clearly shown in 2009, when Zimbabwe Nestlé had to suspend operations, two months after pulling out of a deal to buy milk from a farm owned by President Robert Mugabe's family because of international media criticism (Reuters, 2009) 2.2.1.4 Adaptation strategies adopted by Nestlé In the face of the challenges posed by Zimbabwe's land reform program, Zimbabwe Nestlé demonstrated resilience and adaptability through the implementation of strategic measures a Diversify supply chain Nestlé's decision to diversify its supply chain played a crucial role in mitigating the adverse effects of Zimbabwe's land reform program By sourcing raw materials from countries like South Africa and Mozambique, the company reduced its dependence on local suppliers This strategic move not only ensured a steady supply of essential resources but also minimized the potential disruptions caused by the land reform program Commodity 2000 2001 Milk 10,000 tones 20,000 tones Sugar 5,000 tones 10,000 tones Coffee 2,000 tones 4,000 tones Cocoa 1,000 tones 2,000 tones Table Import of Nestlé Zimbabwe before and after the FTLRP Source: International Food Policy Research Institute, 2005 b Innovate agriculture Recognizing the importance of enhancing productivity in the face of reduced agriculture production, Nestlé made significant investments in innovative agricultural technologies and practices As a result, Nestlé was able to empower farmers and boost their yields, as well as offer its products at more affordable prices, ensuring that consumers could continue to access highquality goods despite the prevailing economic circumstances A prime example was seen in the implementation of a state-of-the-art irrigation system at its dairy farm in Zimbabwe, resulting in an impressive 20% increase in milk production (Nestlé Zimbabwe Annual Report 2007) c New products development Nestlé Zimbabwe employed effective new product development strategies to mitigate risks associated with the local dairy industry, playing a crucial role in navigating the challenges posed by the land reform program The focus on creating new products that necessitate reduced agricultural input, such as powdered milk and infant formula, proved successful in reducing Nestlé's vulnerability Firstly, these products require less land for production as they are derived from processed milk This reduced Nestlé's dependence on local farmers who were susceptible to land seizures under the land reform program Secondly, the shelf-stability of these products surpassed that of fresh milk, facilitating easier transportation and storage Consequently, Nestlé could sustain the supply of its products to Zimbabwe, even during periods of political instability and economic hardships Thirdly, these products often commanded higher prices compared to fresh milk, allowing Nestlé to enjoy higher profit margins This financial advantage helped offset the costs associated with the land reform program and other challenges faced in Zimbabwe Through these strategic adaptations in product development, Nestlé Zimbabwe was able to navigate the risks and limitations imposed by the land reform program, ensuring a continued presence and profitability in the market 2.2.2 Indigenisation policy in 2007 2.2.2.1 Overview of indigenisation policy in 2007 The indigenisation policy was a law that aimed to transfer at least 51% of the ownership of foreign-owned businesses in Zimbabwe to indigenous Zimbabweans, defined as those who were disadvantaged by racial discrimination before 1980 The ultimate objective is to increase the participation of indigenous Zimbabweans in the country’s economy President Robert Mugabe signed the law in March 2008, but it was passed by his party, ZANU-PF, in September 2007 despite the opposition from the MDC party The law was meant to provide support measures for the economic empowerment of indigenous Zimbabweans and to ensure the equitable ownership of the nation’s resources The law also established the National Indigenisation and Economic Empowerment Board, the National Indigenisation and Economic Empowerment Fund, and the National Indigenisation and Empowerment Charter The policy was driven by the government's desire to redress the historical imbalances created by colonialism, which left most of the country's economy in the hands of foreigners and a small minority of indigenous elites The government believed the indigenisation policy would create a more equitable society and promote economic growth The policy applied to all sectors of the economy, including mining, agriculture, tourism, and manufacturing 2.2.2.2 The impact of Zimbabwe's indigenisation policy in 2007 on its economic situation The indigenisation policy was controversial and had several impacts and criticisms Some foreign companies left Zimbabwe or sold part of their shares to local staff Some critics argued that the law was a populist move to win votes in the elections and would benefit only a few elite Zimbabweans instead of the poor locals Some also questioned the feasibility and legality of the law and its implementation The law was also seen as an extension of Mugabe’s previous land reform program that redistributed commercial farms from white farmers to black Zimbabweans, which resulted in a decline in agricultural output and food security One of the impacts was that the policy discouraged foreign investment and led to some foreign companies leaving or downsizing their operations in Zimbabwe This reduced the inflow of capital, technology, skills, and markets essential for economic growth and development The policy also created uncertainty and confusion among the business sector and the public about the implementation and enforcement of the law This undermined the confidence and trust of investors and consumers and affected the stability and predictability of the business environment Figure 4: Net inflows of FDI in comparison with the GDP of Zimbabwe from 2000 to 2008 Source: World Bank national accounts data, OECD National Accounts data files, International Monetary Fund, International Financial Statistics and Balance of Payments databases, International Debt Statistics, and World Bank and OECD GDP estimates The indigenisation policy also impacted corruption, mismanagement, human rights violations, and environmental degradation The policy failed to deliver the promised benefits to the local communities, especially in the mining sector, where most diamond revenues were not shared or invested in development projects The policy was supposed to create employment, income, infrastructure, and social services for the local people, but nothing happened The policy also widened the gap between the elite and the poor, as only a few connected and wealthy individuals benefited from the equity transfers At the same time, the majority of the population remained impoverished