- Counterfeits and the informal alcohol industry is increasingly eating into EABL’s mainstream market.
- EABL net sales remained flat in the year at $769.5 million, impacted by thinning disposable incomes.
- Uganda and Tanzania top line performance up 17% and 1% respectively, while Kenya declined by 4%.
- EABL’s final dividend decreased by 50% from $0.077 paid in FY’22 to a total dividend of $0.039.
A tough macro environment in East Africa is to blame for subdued earnings posted by the East African Breweries (EABL) for the year ended June 2023. Higher excise taxes, rising cost of inputs and effects of the difficult macro-economic environment saw the regional brewer record mixed performance in Kenya, Tanzania and Uganda markets.
The Diageo–owned biggest manufacturer of branded beer, spirits, and non-alcoholic beverages in East Africa reported a 21 per cent drop in net profit for the year. The giant brewer said its sales for the period remained flat, owing to lower consumer purchasing power.
For shareholders, EABL’s final dividend decreased by 50 per cent from $0.077 (Kes11.00) paid in FY’22 to a total dividend of $0.039 (Kes5.50).
Net sales for the financial year closed at $769.5 million, which was a similar revenue performance compared to the prior year. EABL’s net profit declined to $84.7 million, on the back of soaring input costs for glass, ethanol and transport. Multiple excise tax increases and currency depreciation, which could not be fully offset by higher prices and cost management initiatives, cut its profit.
EABL’s Group volumes were down seven per cent year-on-year, as sales were impacted by constrained consumer spending.
Also Read: Diageo buys additional shares in EABL to become its leading shareholder
EABL hit by inflation
Inflation in Kenya, EABL’s biggest market, remained high for the better part of last year into this year. Kenya’s inflation hit a five-year high of 8.3 per cent in July last year. Overall, consumers were exposed to high commodity prices as manufacturers pilled high import and production costs on them.
The year-on-year inflation rate as measured by the Consumer Price Index was 7.9 per cent in June 2023. According to the Kenya National Bureau of Statistics, the inflation was largely due to increase in prices of commodities under food and non-alcoholic beverages (10.3 per cent). Housing, water, electricity, gas and other fuels (9.4 per cent); and transport (9.4 per cent) in the 12 months to June 2023. The three divisions account for over 57 per cent of the weights of the 13 broad categories.
EABL markets performance
The effects of the tough macro-economic environment and regulatory disruptions took a toll on depletions at EABL. Net sales in Kenya declined four per cent with excise tax escalation impacting the price-sensitive mainstream segment.
EABL’s total tax payments increased to $661.6 million in the year under review. This was 47.74 per cent compared to 47.91 percent in fiscal year ended June 2022 of the brewer’s gross revenue. The uptick in taxes was in sync with 20 per cent and 10 percent rise in spirits and beer excise duty.
The company’s consumers in Kenya also shouldered the annual six per cent inflation adjustment. Inflationary impact was also felt in raw material sourcing. In the year the price of grains went up by 31 percent. Further, logistics costs increased by 14 per cent, electricity 40 per cent while ethanol costs surged by 60 per cent.
The trade environment in Kenya also impacted performance, particularly trade distractions leading to county-led bar closures. “However, the premium spirits segment proved resilient, registering double-digit growth,” EABL Group Managing Director and CEO, Jane Karuku, said.
Regionally, EABL’s growth in alcohol consumption was reflected by the 32 percent growth in premium drinks. Revenue from mainstream spirits also expanded to 30 per cent. However, revenue from frontier drinks and beers dipped to 32 per cent and 25 percent respectively.
Kenya remains EABL’s biggest market accounting for about 75 per cent of its annual sales. The group enjoys a 90 per cent market share of Kenya’s formal alcohol market with its competitor Keroche having a paltry two per cent share.
Uganda is EABL’s second largest market where it enjoys a 48 per cent market share. During the period, Uganda posted strong performance, posting 17 per cent growth aided by pricing benefits and higher volumes.
Strong performance in Uganda and Tanzania
“We expect Uganda and Tanzania to continue reporting steady and robust growth driven by mainstream spirits and value beers,” analysts at AIB-AXYS Africa Research said.
Tanzania registered modest growth of one percent as the market continues to adjust to price increases taken earlier in the year. EABL enjoys a 28 per cent beer market share in Tanzania where it owns more than 70 per cent stake in Serengeti Breweries Limited. Serengeti is the second-largest beer producer in the country after Tanzania Breweries Limited.
Overall, EABL remained resilient despite the macroeconomic headwinds, Karuku said. The firm waded through high global inflation and geopolitical disruptions, which raised costs while depressing consumer spending across the year.
“Amidst these challenges, we maintained our strategic focus on delivering value to our consumers and all our stakeholders through executional excellence and operational efficiency,” Ms Karuku said.
She added: “As we navigate the current volatility, we remain optimistic about the growth prospects for our business.” She said the group continues to invest in its advantaged portfolio of brands and insight-led innovations to meet the ever-evolving needs of consumers.
“Together with the relentless dedication of our teams, I expect that we will continue to deliver topline growth, sustained profitability and consistent cash flow generation,” she said during a media briefing in Nairobi.
EABL continued to reap from smart investment behind brands, digital and consumer experiences. The giant brewer invested $91.1 million in capital expenditure during the year to June 30.
The company’s Environmental, Social and Governance (ESG) plan to promote positive drinking, champion inclusion and diversity and pioneer grain-to glass sustainability continued apace, with significant investments behind strategic sustainability initiatives across East Africa.
Illicit alcohol trade
The Kenyan market has continued to record an increase in illicit trade and a growing informal alcohol segment. EABL said illicit trade continues to pose a major challenge to the formal sector and the government.
Kenya loses an average of $501.2 million in taxes annually as a result of the proliferation of illicit alcohol, a June report by London-based Euromonitor Consulting, commissioned by the Alcoholic Beverages Association of Kenya (ABAK) shows.
The survey was to help understand the impact of illicit alcohol on the Kenyan economy. The volume of illicit alcohol sales has recorded strong growth in value since 2020 to stand at $473 million. This reflects wide distribution and increased preference of illicit alcohol especially in low-income settlements.
Illicit alcoholic beverages are very popular with consumers across East Africa. These drinks are often sold at a lower price than legal drinks. Unscrupulous traders dodge tax and excise regulations to trade the drinks at cheaper prices than genuine ones.
Costly raw materials to produce safe alcohol are partly to blame for the problem. Easy accessibility through street vendors, licensed liquor shops, grocery retailers, bars, and other hospitality outlets, is also another factor fueling illicit alcohol business.
Also Read: East Africans’ love for counterfeits
Target market
The main target for counterfeiting is the mass-market, high-volume brands that comprise a mix of mid-market and premium spirit brands. High-quality cider and beer come second as brands targeted by counterfeiters. According to the report, illegal traders are also interested in ethanol, driven by increasing demand from illicit commercial alcohol manufacturers.
Mr. Quinton Walker, a Senior Consultant at Euromonitor International cited weak border patrols, and corruption for prevalence of the menace. Unmanned entry points along Kenya’s borders continue to provide safe passage for illegal traders to conduct their business, he said.
“Illicit ethanol traders have resorted to smuggling ethanol into the country taking, advantage of rising local ethanol demand, price differences and higher ethanol availability in Tanzania and Uganda,” Walker said.
The most preferred border routes are Isibania and Shimoni (Kenya-Tanzania), Mbale and Busia (Kenya-Uganda) and Moyale (Kenya-Ethiopia).
The report proposes the enforcement of tough legal measures for unscrupulous traders undertaking production, distribution, or sale of illegal alcohol.
It also called for more consumer awareness campaigns on the dangers of consuming illegal alcohol on people’s health. “This will act as a deterrent and help reduce engagement in illicit alcohol production,” it says.
