EABL taps spirits to recoup revenue lost in Keg price rise
Senator Keg was tax-exempted during introduction, but this changed last year, hurting its sales. PHOTO | FILE
What you need to know:
Diageo, that owns 50.03 per cent stake in the listed brewer, said the tax had raised the price of Senator Keg resulting in poor beer sales.
An investor presentation by Diageo chief executive Ivan Menezes indicated the decision to use spirits to target the low-end is based on doubts that the Treasury would review its decision to raise taxes on Senator Keg.
East African Breweries Ltd (EABL) will focus on the spirits segment to make up for revenue loss from the low-end focused Senator Keg as hopes of the tax’s reversal dimmed.
Diageo, that owns 50.03 per cent stake in the listed brewer, said the tax had raised the price of Senator Keg resulting in poor beer sales.
An investor presentation by Diageo chief executive Ivan Menezes indicated the decision to use spirits to target the low-end is based on doubts that the Treasury would review its decision to raise taxes on Senator Keg.
“Senator’s performance in Kenya was impacted by the excise duty levied in October. I don’t expect any material improvement here until we lap the duty increase this October and the brand will have a new base,” said Mr Menezes’ presentation.
Senator Keg had a tax exempt status since 2004 when it was introduced in the market as an alternative to illicit alcoholic but the Treasury imposed a tax in 2013 to raise revenues and enhance tax equity.
EABL says the taxes have resulted in some 5,000 Senator Keg retail outlets shutting down. Operations at its Ruaraka plant have also been scaled down and some 100 staff laid off. But the brewer is still banking on the segment using other products.
“In East Africa we’re using Jebel Gold to reach value-conscious consumers. Accelerating the launch of the brand helped offset some of the weakness on Senator Keg as we rolled it out using our bespoke Senator route to consumers in Kenya,” said Mr Menezes.
EABL is expected to release its full-year results next week.
Its half-year performance shows as at December 31, 2013 revenues had increased by 3.9 per cent to stand at Sh31.8 billion against the Sh30.6 billion posted a year earlier while net profits increased by a similar margin to stand at Sh4.1 billion from Sh3.98 billion.
Analysts, however, do not expect low Senator sales to greatly affect results since the move towards spirits has gradually been plugging the gap.
“We have started seeing consumption moving towards spirits. It is a natural evolution towards that market,” said Eric Musau, a research analyst at Standard Investment Bank.
Mr Musau says the harmonisation of tax laws in East Africa is likely to create stability for the industry bodes well for EABL.
Analysts said the drive for spirits is influenced by better profit margins compared to beers.
“The bottom-line growth despite the sharp decline in Senator Keg volumes signifies high-revenue margins in the spirit business of which both the Kenyan and Ugandan market present great growth prospects,” said a report on EABL half-year results by Genghis Capital.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
