Tax burden: Navigating the shift to price-first economy
Promoting and protecting investment in businesses that provide sustainable, multi-sectoral value creation should be at the forefront, as they can offer responsible innovation to support affordability in the short term.
A persistently high tax burden on many households in Kenya has led consumers to turn to creative ways to stretch the shilling.
One familiar strategy is downtrading, where consumers get aggressive at value hunting, often focusing only on the basic functional properties of the products that they use on a daily basis, to guarantee that they get the lowest prices.
This reality is not at all unique to Kenya. In a July 2024 publication, McKinsey suggests that in the post pandemic era, consumers are more open to exploring alternatives, leaving brand loyalty fading across many demographics.
The authors estimate that over a third of consumers experiment with different brands, with 40 percent eventually switching for better prices.
Why is this a problem, you might ask?
For years, large institutional businesses were destinations for employment across generations, creating memorable iconic ads that celebrated Kenya’s heritage. They played a significant role in the socio-economic development within their geographic footprint.
However, many are now increasingly at risk of becoming generic traders focused solely on product distribution.
Compelled to compete in aggressively tough and often mainstream environments, institutional businesses are pushed to reconsider their operating models under the growing influence of a singular competitive dimension, deprioritising focus on costly product differentiation and inadvertently driving their product categories towards commoditisation.
Indistinguishable product features, simplification of packaging, focus on distribution over brand building, price skimming, etc, play to the short term benefit of the brand-agnostic consumer.
Consequent to this, the market shifts from oligopoly to one characterized by high competitive fragmentation.
Facing the impact of growing costs, many manufacturers, especially of regional brands, opt to simplify their Kenyan operating model from a broadened manufacturing value chain to a simplified distribution-only model, and in extreme cases, may completely pull out.
This fragmentation increases the instances of product varieties from the East which have less to offer beyond functional benefits.
It strains the management of standards and quality assurance with a greater variety of materials and processes to certify. It also increases the cost of management of illicit trade as counterfeiting increases due to the cost-reduction incentive.
In the bigger picture, it is observable that the increased presence of the resultant small, informal trader-led businesses, in a fragmented marketplace actually reduce sustainability, the variety of skilled and unskilled labour employed, investment into associated sectors such as farming, transport and advertising and consequently the magnitude of taxable income generated.
It is evident that the preference for fewer and bigger manufacturers poses a risk of monopolistic tendencies that may negatively affect consumers.
However, the broader trend toward a price-first commoditised marketplace has negative long term economic consequences driven by largely unconscionable business practices and definitively lowered accountability.
In conclusion, redesigning the regulatory environment to respond to the evolution of the Kenyan market and product landscape must be a top priority.
Value creation
Promoting and protecting investment in businesses that provide sustainable, multi-sectoral value creation should be at the forefront, as they can offer responsible innovation to support affordability in the short term.
This can be embedded in well considered trade and tax policies such as those that have created successes in economies in countries such as South Korea and Singapore.
The growth of institutional business, if well managed, will certainly lead to improvements in the local standard of living over time and ease the economic burden for consumers of all backgrounds.
The writer is the Head of Planning at Kenya Wine Agencies Limited (KWAL) (Heineken Beverages)
