East African Breweries Ltd (EABL) posted a profit drop of more than 20 per cent on July 28, 2023, as rising costs gave way to flat sales volumes when the manufacturer raised the prices of drinks.
The drop in the company’s profits is against sustained drinking habits by Kenyans, implying consumers might be resorting to cheaper options.
In the past 12 months, EABL raised the prices of its products by an average 8.5 per cent, leading to a slower growth of sales volumes.
The hit in sales from the higher prices has been more profound on EABL’s low end products. Sales volume of brands like Senator Keg fell by three per cent while beer contracted by two per cent.
Curiously, sales of mainstream spirits and EABL’s premium portfolio rose by three and five per cent respectively.
The company says the low-end consumer has been squeezed by higher prices and may as well have turned to the informal market, including illicit liquor.
“That is how consumers of any product behave when prices rise. The low-end consumers get more pressure as their pie, which is already small, has to be cut into many pieces,” EABL Managing Director Jane Karuku told the Nation. Africa.
“Other consumers are a bit more flexible and resilient. Perhaps, because their wallets are a bit bigger.”
For the roughly 3.2 million Kenyans who consume alcohol, according to a recent report by the National Campaign Against Alcohol and Drugs Authority (Nacada), the rising cost of alcohol could mean most are switching to cheap alternatives.
Already, seven per cent of liquor users, according to Nacada, take traditional alcohol while 5.4 per cent reported taking chang’aa.
EABL says passing on greater input cost to customers has damaged the business through slowing sales.
“Our business is in volumes. We call it liquid to lips. The more the liquid goes to the lips, the higher the volume,” Ms Karuku added.
“If you make the decision that leads to a decline in volumes, you are killing the business.”
Lower sales volume on the low end category could have far-reaching consequences, including trimming earnings of farmers who are key participants in the making of the Senator keg brand.
“Since its inception, Senator has been rooted in creating and driving value to farmers, suppliers, communities, the government and the consumer,” EABL says in its 2022 Annual Report.
“It takes pride in uncompromising quality, with locally-sourced ingredients, allowing consumers to enjoy great taste at an affordable price,”
In the prior 12-month cycle, Senator sales grew by 35 per cent.
The sales only declined during the Covid-19 pandemic when on-trade premises like bars and restaurants were ordered shut.
In the past year, EABL saw the cost of grains rise by 37 per cent, logistics by 14 per cent, electricity (40 per cent) and ethanol by 67 per cent.
The company has to pass some of the costs to consumers by increasing the prices of its products or absorbing part of the costs to cushion consumption/sales.
EABL will nevertheless ride on a softer tax regime in the next 12 months, with Parliament having skipped the near annual ritual of raising the floor of excise duty rates on alcoholic beverages while also ending the yearly inflation adjustments on excise duty.
“For the first time in six-years, the difficult clause on inflation adjustment was dropped. This is good for our business and customers due to its compounding effect on costs and prices,” Ms Karuku said.
The manufacturer’s net revenue from sales rose by 0.2 per cent to Sh109.6 billion as indirect taxes jumped by 4.5 per cent to Sh87.9 billion.
For EABL, the regional economic slowdown and inflationary pressure affected the cost of doing business while impacting consumers’ disposable income.
The manufacturer also cited currency deterioration and rising interest rates, particularly in Kenya, as a hit to its business.
“The economic conditions have led to a resurgence in illicit trade as consumers move to cheaper unregulated products,” EABL said in a trading update.
Despite the drop in profits, the brewer invested a further Sh12.9 billion in its business, including the expansion of its plants in Tanzania and Uganda and the construction of a micro-brewery in Ruaraka, Nairobi.
