Tax relief renews price war in spirits market

A rare U-turn by the taxman on duties charged on alcoholic spirits has set the stage for intense rivalry among the country’s distilleries promising a lift to consumers who have been seeking solace from cheaper but potent alternatives decanted in informal settings.

Treasury had increased excise duty on spirits from seven shillings a litre to Sh120 or 65 per cent of the value, whichever is higher, in the 2009/10 budget, pushing product prices by more than 20 per cent.

Last week, treasury made a climb down and reduced the duty to 35 per cent, offering reprieve to distillers whose spirit sales have been on decline as the high prices and effects from country’s soft economy continued to push a large fraction of alcohol consumers in the bottom incomes bracket to illicit brews and low priced spirits that are yet to be trapped into the taxman’s net.

Besides offering consumers already shackled with expensive food, transport and utility expenses affordable liquor, the lower prices rekindles hopes of distillers such as EABL of wooing customers back to their spirits brand and grow profits at a time when the beer business, which accounts for 82 per cent of its revenues, appears to be headed for maturity.

East Africa Breweries Limited (EABL) announced a 40 per cent price cut on its premium spirits products such as Johnnie Walker, 13 per cent on brandies (Richot) and 20 per cent of the low end Cane sprits.

Rivals distillers including government owned Kenya Wines Agencies Limited (Kwal) whose flagships include Viceroy and Kibao and Naivasha based Keroche are mulling similar plans on worries that delays in rolling out lower prices would allow EABL to munch its market share.

“We are taking a similar move and our new reduced prices will be out on Friday,” said Tabitha Karanja, the managing director of Keroche Breweries as Kwal said that its reduced price schedule will also kick off today.

The spirits business accounts for 11 per cent of EABL’s revenues and it declined 33 per cent last year while Keroche’s was down 35 per cent with a similar performance expected from Kwal.

EABL’s group finance director, Peter Ndegwa, Thursday said that the brewer had cut prices deeper than the benefits they are getting from the tax reprieve, setting the stage for a price war with its rivals - London Distillers, Kwal and Keroche - and dealers selling low priced untaxed sprits.

“Our expectation is that our premium customers are likely to interact more with our products,” said Mr Ndegwa in reference to products such as Johnnie Walker, J&B and Tequilas whose prices were cut by nearly half.

“In lower segment of the market will bring back consumers who had dropped off to cheaper illicit products,” added Mr Ndegwa in an interview Thursday.

The low segment of the market, which EABL serves with the Cane spirits brand, is crucial for the brewer since its accounted for 70 per cent of the spirits volume its pushed in the market volume last year.

EABL’s financial results show that the bottom end of the market where the brewing giant sells its Senator Keg brand and a range of low priced spirits has been recording the fastest volumes growth over the past five years.

As a result, the low end of the market would be significant to mainstream distillers who have in recent months been reorganizing their operations including unveiling budget brands to protect their revenue streams in a market where volumes growth has flattened out. But this bottom of the pyramid segment of the market has faced unique problems with the poor state of Kenya’s economy and a punitive tax regime Treasury had been pursuing since 2008.

The underperforming economy that has eroded a large fraction of beer consumers’ disposable incomes, forcing a large number of alcohol consumers in the bottom incomes bracket have retreated to the comfort of illicit and sometimes lethal brews whose sale points are mostly found in urban slums, low income neighbourhoods and rural villages.

As a result, the illicit brews have since 2008 munched a huge market share previously held by the mainstream industrialist, forcing the mainstream players to contend with falling volumes and profits.

The onslaught is expected to go a notch higher should Parliament pass a Bill that seeks to repeal the 30 year ban on brewing and consumption of traditional liquor.

With the mainstream beer market having reached the maturity with a near leveling out of growth, EABL is betting big on its spirits business on the strength that it offers plenty of headroom for growth, says Mr Ndegwa.

The National Agency for the Campaign Against Drug Abuse (Nacada) says that huge chunk of liquor market is controlled by the untaxed illicit brew market is worth, arguing that the formal mainstream segment accounting for only 40 per cent of it.

“It (spirits) is becoming a very important business in the group,” added Ndegwa.

Beer volumes have been growing at slower pace since 2007 on account of slowing economy and high levels of inflation that have ravaged consumers spending power.

Last year, for instance, EABL’s sales volumes declined by 4 per cent shackled by the Kenyan market even as Uganda recorded a 23 per cent growth in volumes.

In 2007, the brewer returned double digit, much of driven by the low priced Senator Keg -- which delivers volumes but less value compared to flagship Tusker, WhiteCap and Pilsner brands.

For EABL, a drop in volumes in the Kenyan market that accounts for about 77 per cent of revenues is significant, especially because it comes at a time when the brewer is also facing unique challenges in its Uganda and Tanzania operations.

In October, EABL announced price increases of between Sh5 to Sh10 per bottle to help grow its flat revenues and offset the rising production costs.

In the financial year ended June 2009, an increase in product pricing helped offset the rising costs and falling consumption volumes enabling EABL to realise a one per cent increase in net sales to Sh26.5 billion from Kenya operations. For Kwal, which abandoned its loss making streak four years ago to post a Sh68 million profit in the year 2005/06, the tax reprieve should buoy the profit momentum.

The firm is yet to make public its 2009 financial figures, it reported a pre- tax profit of Sh148 million in the year ended June 2008.

But the tax reprieve comes as a major boost to Keroche Breweries given that the spirits business accounts for a larger share of its business.

Keroche had been making fortified wines for 10 years, mainly targeting the low-income earners, but a jump in excise tax on its wine in 2006 forced it to diversify to the mainstream beer market, placing it in a head to head battle with EABL who enjoys a monopoly of the local beer market.

So far, Keroche’s exploits in the beer market has not shaken EABL’s dominance forcing it to seek help from the Monopolies and Prices Commission.

Keroche has complained that EABL was hindering promotion of its beer brands by bribing and issuing threats to bar operators not to deal in its products.

But the tax reprieve has given Keroche a reason to reposition its spirits business, notably in the low end market.

“We will continue to protect our turf by offering quality products,” Mrs Karanja said adding that the battle will be fought on pricing fronts.