Kenyan brewers to benefit from EAC’s tax reprieve

Local beer brewers have won a major reprieve after being granted an extension on the payment of lower import on malt and barley in a move that will protect the brewers’ earnings in a market where consumption volumes have remained flat with slow the pace of economic growth.

The Kenyan brewers were expected to pay a duty of 10 per cent and 25 per cent on malt and barley respectively from last July following a proposal contained in this years East Africa Community (EAC) financial budget.

But the Kenyan government successfully appealed for the retention on the previous rates of zero and 10 per cent duty on malt and barley respectively, citing its impact on local beer makers given that poor weather had cut local cereals production by 30 per cent.

“The ministers granted the request by Kenya for extension of remission of duty on malt to apply an import duty rate of zero per cent instead of 10 per cent and for barley to apply an import duty rate of 10 per cent instead of 25 per cent until June 30, 2010,” a statement from the EAC secretariat stated.

The move is set to prop up the earnings of East Africa Breweries Limited (EABL) and its rival Keroche Breweries in a flat Kenyan market where an under-performing economy has eroded a large fraction of beer consumers’ disposable incomes — leading to flat earnings.

But the news is not likely to be received well by the Kenya Revenue Authority (KRA) which is currently trailing its tax targets.

Cost of barley and malt

Given that the cost of barley and malt, the main raw materials in the brewing process, account for a huge chunk of the brewers’ production costs, analysts estimate that the reprieve could translate to savings of between Sh600 and Sh800 million for EABL.

The proposed import duties could have hurt EABL’s earnings at a time when it’s struggling to contain its costs in a market that recorded a fall in earnings in the financial year ended June.

The firm realised a one per cent increase in net sales to Sh26.5 billion from Kenyan operations, helped by an increase in product price that offset flat consumption volumes, but rising production costs led by cereals and utility costs saw its Kenyan profits drop five per cent to Sh9.2 billion.

Beer volumes have been growing at a slower pace since 2007 on account of the slowing economy and high levels of inflation that have ravaged consumer spending power.

The brewer, however, increased its product prices last month by between Sh5 to Sh10 per bottle on selected brands presumably to take care of the proposed tax charge that was expected to pile pressure on production costs.

Analysts estimate that the price increment could add about Sh1.5bn to the brewer’s top line.