EABL regional expansion stalls

Seven years after winning its toughest turf war yet against leading South African brewer, SAB, East African Breweries Ltd is learning that entering new, far-away markets can be trickier than pushing out a rival.

When in May 2002 EABL, the region’s brewing giant, forced South Africa Brewery International (SAB) to close its Castle Brewing plant in Kenya after a bare-knuckle marketing assault on its brands, it acquired the much-needed psychological boost to pursue a pan-African expansion strategy.

But that, as EABL Group CEO Gerald Mahinda has discovered with his planned entry into Ethiopia and Rwanda, is easier said than done. “It has been painful and very slow in Ethiopia,” Mr Mahinda said recently, a euphemism for a rocky situation. “And Rwanda has not been as fast as we expected.”

Spreading the bets

Currently, the NSE-listed brewer has operations in Uganda with its beer brands selling in Rwanda, Southern Sudan and Tanzania. In the diaspora market, its main brands Tusker Lager and Tusker Malt are available in the UK, USA, Australia, Canada, Spain, Germany, and other European countries.

The diaspora market registered a 265 per cent growth, according to the company’s 2008 financial results. At its investor briefing last week, EABL shared the pain it is facing to realise its dream of conquering the Great Lakes Region, a market with an estimated 240 million people.

In its pan-Africa expansion strategy, EABL is seeking a presence in DRC Congo, Southern Sudan, Ethiopia, Eritrea, Somalia, Rwanda and Burundi. Branching to Southern Sudan, Mr Mahinda said, is paying off and helping lift the regional market, with sales outside Kenya, Tanzania and Uganda registering a 50 per cent growth. Its operating profit in the six months to December 2008 grew 51 per cent.

Uganda provided 20 per cent growth in sales volume and 15 per cent increase in operating profit over the same period. But with Kenya, the brewer’s core market, providing a marginal growth of 4 per cent and negative 10 per cent in operating profit, the company must expand its regional market to sustain profitability.

Overall, over the six months to December 2008, EABL recorded a marginal 5 per cent increase in pretax profit to Sh6.7 billion, up from Sh6.4 billion recorded in the same period to 2007.

Its revenues are being largely pulled back by the Kenyan market, which has faced challenges of a slowing economy, inflationary pressures from the post-election violence and volatile oil prices as well as increased taxation for alcoholic products.

The company hopes that spreading the country risk would open up new revenue streams and power its next phase of growth by preying on less competitive but thirsty markets abroad.

It’s not hard to understand why Ethiopia is such an irresistible target. With a population of 70 million people, the country has a stable economy powered by coffee exports with a growing pool of middle-class spenders. EABL has been salivating for the market since 2006.

“Clearly its is not as easy as we earlier thought,” Mr Mahinda told investors. “ But what is important is that we have not moved out of that market.”

That may not assuage investor worries as in 2007, EABL said it was evaluating its options to invest in Ethiopia, dampening hopes for an immediate breakthrough. Analysts say EABL might have to change tack.

“We are in the process of engaging a strategic partner on that,” Mr Mahinda said in an interview. “We believe Ethiopia has great potential. The prospects are quite attractive and there are enough fundamentals for us to invest there.”

EABL had planned to buy out one of the three state-owned breweries in Ethiopia when its government called for tenders to dispose of the companies – Meta Abo, Harar and Bedele Breweries — as part of a privatisation programme.

Of the three, it was not clear which one EABL was courting to close a deal with, but the Ethiopian government changed tune at the last minute, ruining its plan. “After revaluating and seeing that the breweries were profitable the government decided not to sell,” said Mr Mahinda at the time.

Clearly, Mr Mahinda’s Friday’s cagey explanation sounded optimistic about the two crucial markets. When lumped together with the larger Great Lakes Region (GLR), it provides a potential market of 240 million.

Analysts believe that Rwanda’s beer makers’ bottling style might force EABL back to the packaging drawing board. According to people familiar with the matter, Rwandese like their beer in large quantities.

However, the beers have a lower alcohol content and manufacturers push the larger 750ml or one-litre bottles compared to the Kenya’s situation where beers come in smaller doses but stronger in content. Most Kenyan beers and malts are packaged in half litre or 300ml.

“Tell me, how do you push a drink like Tusker Malt in such a market? That’s too little for them,” said the source.

Sudan is focal point

In the half-year results, EABL realised a 40 per cent volume growth in exports to the Great Lakes region including Rwanda, DRC Congo, Burundi and Southern Sudan, with net revenue hitting 70 per cent boosted by doubled marketing spend.

In the entire Great Lakes Region, Southern Sudan remains the focal point of EABL’s exports and the company is now laying the ground work to set a plant there. “I can tell you we are considering setting up a plant there and everything is in the initial stages,” says Mr Mahinda.

He says the Great Lakes Region is lucrative because of resources like mineral wealth in Southern Sudan and a larger purchasing pool.

Ironically, the diaspora market that has been riding the Obama wave, particularly among African citizens living abroad, is not receiving as much attention.

Among the innovative products that EABL pushed into the Kenyan and Uganda market last year on the Obama factor was the President brand that the company intends to continue retailing.

Uganda and Kenya form the vital EABL market with the former having registered a 20 per cent volume growth against Kenya’s 4 per cent in period under review. Such a sterling performance by the Uganda was stimulated by a 42 per cent increase in marketing spend there while Kenya’s marketing budget grew by only 6 per cent.

Kenya contributes 70 per cent of EABL’s profits with beer accounting for 80 per cent while spirits bring in 11 per cent. According to Mr Mahinda, key indicators for the company paint a rosy picture with most markets showing a good history of their gross domestic products (GDP).

Mr Mahinda predicted a GDP growth of between 3 and 3.5 per cent in Kenya and 4 per cent in Uganda even in the face of the global financial crisis that is seen to slow down growth in some economies. Without elaborating, he says the company is also expected push an aggressive “cost management agenda,” meaning it would be seeking to streamline its costs and encourage efficiency.

Now, taxing matters...

“In the first quarter of this financial year, the Kenya shilling depreciated by 25 per cent depleting oil price gains that had been declining after a year characterised with historical highs,” said the group finance director, Mr Peter Ndegwa.

According to the brewer, significant cost pressure was mostly caused by rising prices of raw materials, energy and currency depreciation. The effects of the post-election also became clearer with the barley growing areas being the worst affected by skirmishes.

“Our inputs from farmers were greatly affected by the (violence) and this year we had to import the raw materials,” said Mr Mahinda. Beer making raw materials include malt, barley and hops.

Mr Mahinda said EABL’s Sh2 billion packaging line was commissioned in December and would enhance the brewer’s output, adding it would keep its focus on beer, spirits and the less than a year old adult soft drink, Alvaro.

Nonetheless, the biggest worry for EABL locally remains taxation. “We are engaging with the government on tax issues especially excise tax on beer and spirits as we do not want any more surprises as far as taxes are concerned,” he said.

The taxman raised taxes on spirits by 300 per cent between June and December to coincide with the December festivities, when consumers drink more, and two tax increases on barley beers translating to a 70 per cent tax increase in six months.

On taxation, sources reveal that the brewer will be pushing for the international practice to be followed whereby the tax is based on the alcoholic content per litre.

plwahome@nation.co.ke