Keg beer prices set to go up as new tax comes into effect

East African Breweries Limited (EABL) is expected to significantly increase keg beer prices in about two weeks when fresh tax regulations introducing excise tax on the product come into effect.

The low-end beer variety that was previously exempt from the excise will now attract tax at the rate of 50 per cent starting October 1, a burden that is most likely to be passed on to consumers.

The measure is likely to pile pressure on the brewer battling to reverse a substantial fall in profit, more so in three years when the tax concession is fully phased out.

EABL says the new tax measure that adds a cost of Sh35 per litre is likely to slow down sales for the Senator keg, billed as the firm’s biggest beer brand in terms of volumes, and hurt its earnings.

(READ: EABL sees sales drop after new tax measure on Senator Keg)

There are fears that a price hike for the beer targeted at the low-end market will lead to higher consumption of illicit home-made brews and derail efforts to migrate low-income earners to the formal alcohol market.

A 50-litre barrel of Senator beer is currently refilled at about Sh3,146 and retailers sell a 300-millilitre mug at Sh30 while a half-litre mug goes for Sh50.

“Volumes are expected to slow significantly for Senator keg, which targets consumers transiting from the informal market (which accounts for close to half of Kenya’s beer market),” said a research note by the Standard Investment Bank (SIB) after a briefing with EABL management.

Retail prices for the containerised beer are expected to go up by a third as the listed brewer passes on the levy to consumers.

“It may see the low-end segment, which was captured by keg beer, slide back to cheaper but harmful illicit brews,” said Eric Musau, a research analyst at SIB.
EABL declined to respond to multiple queries from the Business Daily.

Treasury secretary Henry Rotich has said the government plans to raise Sh6.2 billion annually from the 50 per cent excise tax remission on Senator keg. Kenya Revenue Authority charges excise duty on all beers at the rate of Sh70 per litre.

The price increase comes at a time when EABL is racing to reverse a 38 per cent drop in net profit for the year ended June 2013 that stood at Sh6.9 billion, weighed down by a surge in financing costs.

This could be the third time EABL is increasing beer prices this year, having twice hiked prices for its conventional beers in March and July citing increased raw material costs.

EABL says volumes for emerging beer products, which include Senator, Balozi and Allsopps, grew 12 per cent last year, faster than mainstream beers that was up three per cent.

The burden of excise duty on beer served from barrels will be borne by consumers who are already saddled with VAT on essential goods such as milk, cooking gas, electricity, exercise and text books and mobile phones.

The Diageo-owned firm is the only player in the containerised beer market in Kenya.

EABL introduced Senator keg in 2004 with an eye on low-income drinkers, especially in informal settlements and rural areas who could not afford bottled beer.

“The current regulatory framework will need to encourage more players into the value proposition keg beer. This way government can maximise revenue while at the same time ensure illicit consumption is stemmed,” said Ken Kariuki, an industry consultant.

The lion’s share Kenya’s total alcohol consumption is held by informal players who deal in traditional brews and illicit liquors.