Beer maker EABL is set to terminate supply contracts with at least 20,000 sorghum farmers, in a pointer to wider economic losses expected from the sharp drop in sales of the low-end Senator Keg beer.
East African Breweries Limited (EABL) last week reported a five per cent growth in after-tax profit to Sh6.85 billion, but announced that sales of the previously fast-growing Senator Keg, which was hit by a tax increase, had plunged by 75 per cent.
The brewer revealed that it is sitting on 13,000 tonnes of sorghum, the main raw material used in production of the Senator Keg – an amount that it said is enough to sustain production for three years at current sales levels.
“This year, we will not be renewing a majority of 26,000 contracts simply because we do not need all that raw material at the moment,” said EABL managing director Charles Ireland after announcing the company’s performance. Senator Keg had recorded quick growth since its introduction as a cheap beer meant to lure low-income earners from consuming illicit and in most cases unhealthy brews.
The growth, however, took a nosedive after the Treasury introduced a 50 per cent excise duty on the previously tax-free beer, which more than doubled the cost of the drink. The government had targeted to collect Sh6.2 billion from introduction of tax on Senator Keg. Soon after the increase, over a quarter of the 12,000 outlets that used to sell Senator were closed due to low sales.
EABL reacted by introducing new, low-cost spirit brands to plug this gap, spent Sh1.2 billion on laying off staff and also reduced the brewery schedule to five days from seven.
The impact of the drop in Senator Keg sales is now set to be felt by farmers in Western and Eastern Kenya who have since 2008 been supplying EABL with the cheap grain. “This year, we had entered into contracts with farmers to supply 20,000 tonnes of sorghum because we thought we would need it.
“The company honoured these agreements and bought the grains even when Senator Keg volumes reduced. If these farmers choose to plant the crop this year, they will have to secure alternative buyers,” said Mr Ireland.
Sorghum has increasingly become a raw material of choice in the brewing industry since it is resistant to climate change and its cost is lower than that of barley or malt. Barley is largely sourced from international markets exposing brewers to high and volatile prices of the commodity. EABL has been shifting focus to sorghum to save on production costs.
The regional brewer’s purchase of 20,000 tonnes last year was double what it had sourced the previous year, highlighting the crop’s high demand and its value to farmers as a key source of income.
Even listed companies like agribusiness firm Kakuzi have announced plans to venture into large-scale growing of sorghum for sale to breweries in the region, highlighting the attractiveness of the crop.
In the year to June 2012, EABL posted Sh11.1 billion in net profit, which the brewer is yet to hit again. Sales grew by four per cent from Sh59 billion to Sh61.3 billion during the period driven by premium beer brands such as Guinness and Tusker, which recorded double-digit growths.