Insights from Zimbabwe’s Tobacco Industry by David Machingaidze of Ethical Holdings

Interview with David Machingaidze, Chairman at Ethical Holdings

Let’s begin by delving into the background of Ethical Holdings and Ethical Leaf Tobacco. Could you provide a concise overview of how these ventures came into existence?

Ethical Leaf Tobacco began as a social entrepreneurship initiative aimed at supporting small-scale tobacco farmers. I have been involved in the tobacco industry since 2000, and during that time, small-scale tobacco farming was often overlooked and mistreated. I had a personal affinity for these farmers and saw an opportunity to make a positive impact. Partnering with a major tobacco company, we secured financing to develop these farmers and improve crop production. This initiative grew into Ethical Holdings, and within two years, we expanded into cotton production with the establishment of the Zimbabwe Cotton Consortium, now one of the country’s top cotton producers.

Additionally, we ventured into microinsurance with Ethical Micro Insurance, supporting our tobacco production operations. Our focus has always been on creating a sustainable business with social impact beyond profit. We took on the challenge of financing high-risk farmers, paving the way for others to recognize their potential. This approach has significantly contributed to the increased tobacco production in Zimbabwe, with a substantial portion coming from smallholder farmers.

Our long-term goal is to pursue value addition opportunities, aiming for higher returns that can benefit both our business and the farmers we work with. By providing support such as affordable inputs and investment in yield improvement, we aim to create a positive cycle of production and prosperity. We believe in the potential of bottom-of-the-pyramid philosophies and are committed to playing our part in empowering farmers to unlock substantial value. This mutually beneficial approach allows us to maintain profitability and sustain our growth trajectory.

Could you highlight your competitive advantage in the sector?

Our main competitive advantage lies in the unique relationship we have fostered with the farmers. As I mentioned earlier, small-scale farmers were often marginalized. Our motto, “farmers first,” underscores our commitment to treating them with dignity and respect. Even without offering premium prices, our attentive approach to addressing their needs has made a significant impact. We entered the industry with a fresh perspective on farmer relations, and they have responded positively to our approach. Ultimately, it is the quality of service we provide that has cultivated this special partnership with tobacco farmers.

Considering the competitiveness of the sector and its growth, what have been the challenges, opportunities, and emerging trends?

Regarding challenges, one major hurdle has been financing. Initially, we partnered with one of the world’s largest leaf merchants, which provided financing for our tobacco production. This arrangement has been successful for about eight years. However, about three years ago, we began exploring local bank financing and engaging in tobacco auctions. In the auction system, tobacco is available for bidding without restrictions, allowing us to pursue value addition. This approach allows us to pursue value addition by processing and selling locally produced tobacco in export markets. However, local financing can be expensive, with interest rates up to 15-16%, necessitating a focus on shortening our working capital cycle to minimize costs.

Another challenge has been the export markets. While we are in the process of developing our own, currently we collaborate with international merchants, albeit with smaller margins than direct sales to cigarette manufacturers. Over time, we aim to establish direct market linkages to access offshore funding at lower costs than local financing.

Additionally, another significant challenge we face is the reliance on rain-fed agriculture. The farmers we work with typically own small plots of one or two hectares, which makes investing in irrigation infrastructure economically unfeasible. The lack of funding further exacerbates this issue, as it would take three to five years to recoup the costs of a basic drip irrigation system. Consequently, we are vulnerable to weather fluctuations, such as the recent drought. However, we mitigate this risk by diversifying our operations across tobacco-producing provinces, including Mashonaland West, Mashonaland Central, Mashonaland East, and Manicaland. This geographical spread helps us weather challenges more effectively; for instance, while Mashonaland West may suffer from drought, Mashonaland East might still fare relatively well. Addressing the limitations of rain-fed agriculture is crucial for the sustainability of our operations in the long run.

As for opportunities, there is significant potential to improve farmers’ yields through education, timely access to quality inputs, and adherence to best agricultural practices. Enhancements in curing techniques and tillage quality can also boost yields, with plans to provide tillage services to farmers to increase productivity and minimize credit risks.

Moreover, the most promising opportunity lies in value addition, particularly in the production of cigarettes and cut-rag, which bridges the gap between raw leaf and cigarette-ready material. While the local cigarette market is modest, neighboring regions present lucrative opportunities due to higher smoking prevalence rates. Our long-term vision involves diversifying our product range, including cigarettes, to maximize returns and positively impact farming communities.

Are there any new projects you are currently involved in?

We are thrilled about our upcoming cigarette factory venture. We have secured the premises, which are ready for operation. Currently, we are in the process of acquiring and installing the necessary equipment. Within the next 12 months, we anticipate entering the market with our own brand, developed from scratch. Breaking into the cigarette market is challenging due to consumers’ strong brand loyalty. Therefore, significant investment, especially in marketing and promotions, is necessary to successfully introduce our product. I believe we have got the right team in place, with professionals on the engineering side as well as the marketing side, to bring that project to fruition. This venture is particularly exciting considering Zimbabwe’s heavy reliance on exporting raw tobacco. Our long-term goal is to list the entity, which requires achieving a critical mass in terms of operational size, sales, and profitability. Value addition through manufacturing represents our strategic direction, attracting the caliber of investors we aim for.

Could you provide more details about the brand you plan to introduce?

We are planning to launch three variations of our cigarette brand. These three varieties will consist of a toasted blend, a Virginia blend, and a menthol variety. These three are among the most popular brands, not only in the local market but also in the regional market.

Where are the majority of your exports currently routed through, and which locations stand out as significant export destinations?

Currently, most of our exports are going through Malawi, as well as Dubai. I would say the bulk is going through Dubai. That has been the biggest export destination for us.

What are your aspirations for the next three to five years? What do you envision for the upcoming years?

Over the next three to five years, our primary goal is to establish a robust cigarette brand, gaining prominence both locally and in regional markets. This development stands as our foremost objective. Subsequently, we aim to attract investment, ideally from prominent institutional investors, pension funds, or private equity firms, to fuel our business growth.

We are focused on building a diversified agribusiness, with tobacco being the cornerstone, encompassing both cigarette production and the export of tobacco leaf. Additionally, we see significant potential in revitalizing the cotton industry, which currently operates at low production levels. Expanding cotton cultivation excites us as a possibility.

Our third cluster revolves around services, including the expansion of our financial services segment into microfinance operations. Our current input credit scheme essentially functions as microfinance, catering to thousands of farmers. Formalizing and licensing this as a dedicated microfinance business is a key objective. Moreover, agricultural services such as tillage and long-term irrigation are areas we plan to delve into.

In terms of trading, packaging, and involvement in the agri-input sector, we aim to expand our presence. Real estate holdings, albeit at an early stage, are an avenue for growth that we intend to pursue further within our services cluster. The overarching pillars of our endeavor remain tobacco, cotton, and the services cluster.

Logistics is another significant aspect we intend to address, considering its crucial role in the transportation of commodities such as tobacco and cotton, from farms to factories and ports. Hence, we envision involvement in logistics as part of our development trajectory, aligning our investment targets accordingly.

In a more personal context, reflecting on your journey, what motivated you to pursue this endeavor?

The genesis of the name Ethical Holding provides some context. I have spent approximately 20 years as a corporate CEO, where I encountered ethical challenges. There were instances when I found myself in situations where unethical practices were prevalent, such as procurement fraud. Despite my efforts to implement best practices and corporate governance to address these issues, I often faced resistance and backlash. Unfortunately, my experience was not positive, as I found myself penalized for upholding ethical standards.

When I had the opportunity to establish my own business, particularly in the tobacco industry, I recognized the ethical challenges within the sector. My aim was to demonstrate that by offering fair treatment to stakeholders, including farmers, financiers, and staff, we could leverage ethics as a significant competitive advantage. I am glad to say that this approach has proven successful. We have established strong partnerships with financial institutions based on our track record of ethical conduct. Instead of being a liability, ethics have become a driving force for our business.

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