BAT eyes Sudan as cigarette sales in Kenya stagnate
The BAT factory in Industrial Area, Nairobi, The firm is keen on reducing its reliance on the Kenyan market, as consumption has remained flat in the last six years. Photo/LIZ MUTHONI
British American Tobacco Kenya (BAT) is set to venture into Southern Sudan to expand its export business as the local market comes under increasing regulatory pressures.
The cigarette manufacturer said it was finalising talks with the Southern Sudan government to begin supplying that market by year-end, a move that is expected to grow its export business that absorbs 62 per cent of its production.
“Consumption in Kenya has been flat for about six years now,” said Gary Fagan, the BAT Kenya managing director. “We want to increase our production efficiencies to meet the growing demand from the export market.”
16 markets
BAT Kenya supplies 16 markets in the Common Market for Eastern and Southern Africa (Comesa) region and plans to deepen the external market to protect its sales from unpredictable tax regimes and increased regulation by health agencies in Kenya.
Mr Fagan said that since August last year, the firm has exported 1,000 tonnes to semi-processed tobacco products to Egypt, with plans to increase the volumes to the country by up to 8,000 tonnes by end of the year.
Weak demand from external markets last year saw export sales decline marginally to stand at Sh4.9 billion or 36.2 per cent of the Sh13.5 billion total turnover, with the firm keen on reducing its reliance on the Kenyan market.
BAT sales in the local market have been hit by the Tobacco Control Act that has in the past few years prohibited smoking in public and advertising of tobacco products as the government seeks to discourage smoking that is a major cause of lung cancer and other illnesses.
The company, which has the biggest share of the cigarette market in Kenya, has also suffered from rampant counterfeiting of its products estimated to rob it of at least 10 per cent market share.
The move to deepen the export market comes as the tobacco industry faces uncertainty in the taxation regime, with the Minister for Finance expected to announce a new system for taxing tobacco products in the upcoming budget.
Officials at Treasury, Ministry of Medical Services, and the Kenya Revenue Authority are working on plans to introduce a single tobacco taxation regime hinged on inflation, meaning that the tax rate will go up and down with the prevailing costs of common goods and services.
“If the tax is placed at the current high inflation levels then that will erode consumers’ purchasing power which in turn hurts sales,” Mr Fagan said, adding that the company supports the new tax system so long as the government reigns in inflation.
Inflation touched a 17-month high last month on the back of surging international oil prices and food shortages occasioned by the recent drought.
This has seen the costs of local pump prices and staple commodities go up by large margins, causing consumers to realign their budgets against non-essential habits like smoking.
The new tax proposal comes barely six months since Treasury changed taxes on cigarettes to rely on retail selling price from the complex system adopted in the June 2010 budget where physical characteristics of cigarette sticks and packaging were key factors determining tax levels in the industry.
The current taxation regime has seen the government lose billions of shillings in revenue after BAT revised its pricing of key brands Sportsman and SM by 29 and six per cent to Sh70 and Sh90 a packet in January to avoid paying higher taxes and boost the market position of the brands.
Sh10 billion in taxes
This has seen effective revenue collection drop to Sh960 per 1,000 sticks from Sh1,300 per 1,000 sticks, with the full-year revenue loss estimated at Sh2 billion.
BAT, which is the country’s fourth largest tax payer, is lobbying the government to lower taxes on tobacco products ahead of the expected tax changes as it seeks to avoid raising its product prices at a time when consumers are becoming price sensitive.
Last year, BAT paid a total of Sh10 billion in taxes, including excise duty, corporate and value added tax (VAT).
“High inflation affects our consumers and we have to be very careful about our product pricing,” Mr Fagan said.
BAT last year grew its revenues by 22 per cent to stand at Sh13.5 billion from Sh11 billion on the back of a strong performance in Kenya’s economy and gains from new distribution systems and clamp down on counterfeit cigarettes that mainly target Sportsman –BAT’s flagship brand.
