E-Malt.com News article: Kenya: New bill seeks to repeal ban on brewing traditional liquor, beer market expected to experience a big shake-up

A Member of the Kenyan Parliament has published a new Bill seeking to repeal the 30-year ban on brewing and consumption of traditional liquor in a move that promises a big shake-up of the nation’s beer industry, The Business Daily communicated on November, 2.

Naivasha MP John Mututho is spearheading the new law that seeks to legalise the production, sale, and consumption of chang’aa, arguing the ban imposed on traditional liquor during the early days of former President Daniel Moi’s rule has driven the business underground with disastrous results.

The move is expected to realign Kenya’s liquor market that remains in the firm grip of East African Breweries Limited, the country’s biggest brewer and smaller players such as government-owned Kenya Wines Agencies Limited (KWAL) and Naivasha-based Keroche Industries with a presence in the spirits market.

Kenya’s liquor market is estimated to be worth Sh42 billion with the formal mainstream segment accounting for only 60 per cent of it, according to the National Agency for the Campaign Against Drug Abuse (Nacada).

This means that the untaxed illicit brew market is worth Sh16 billion, a reality that Mr Mututho is partly using in his quest to lift the ban on chang’aa.

Lifting the ban is particularly expected to rekindle intense competition for control of the bottom end of the liquor market that has become the growth segment of the beer market in what economists see as the result of consumer spending shift in a difficult economic environment.

Illicit brews are estimated to control at least 70 per cent of Kenya’s spirits market, despite their blatant contravention of the set requirements for manufacturing as well as trade in alcoholic beverages — tax obligations, quality certification, wholesomeness and packaging.

More recently the government has been pushed into disaster management as a significant proportion of low income earners turned to cheap illicit drinks –– sometimes laced with deadly additives that have caused deaths or mass blindness among consumers.

If passed by Parliament, the new law could see the proliferation of small but regulated brewers of chang’aa leading to better packaging of the drink and intense competition with established brewers for the spirits market.

Though mainstream brewers maintained that they are not worried of competition from new players, some analysts predicted that legal consumption of chang’aa bears the potential of determining the revenue and profitability trends of established brewers in the long term.

“The structure of the beer industry is such that the players have positioned themselves in certain segments of the market and locked it in,” said Francis Mwangi, an investment analyst at African Alliance. “In the long-term, however, chang’aa may win a significant share of the bottom end of the market especially if inflationary pressure persists.”

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 recorded the fastest volumes growth in the four of years to June 2008 when the government introduced a new tax on locally manufactured fortified spirits.

Senator, a drink targeting the low- end of the market, emerged as a major driver of the results besides its flagship Tusker brand.

Senator Beer overtook Tusker on the volumes front in 2008, but the latter still contributed the largest revenue to the brewer at about 30 per cent with Senator bringing in about 14 per cent.

But since its entry into the market in 2004, Senator has grown at a compounded annual rate of 50 per cent in terms of volume, rising from 500 units in 2003 to 3,700 units in 2008.

The growth is mainly attributed to its lower pricing compared to other EABL brands, a move that has seen it capture a huge chunk of the low end of the market despite the difficult economic environment that has sparked intense competition for the customers’ wallets.

A unit of Senator retails at Sh15 compared to that of Tusker at Sh75.

This year, Senator continued to show strong growth while other brands including Tusker, WhiteCap and Pilsner have been growing at a slower pace since 2007.

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

Spirits volumes declined 33 per cent in the Kenyan market on what the brewer attributed to tax increases that pushed product prices by more than 25 per cent.

With the mainstream beer market having reached the maturity with a near levelling out of growth, top liquor firms had set their sights on the bottom end of the market for future growth spending millions of shillings in research and innovation for products that are affordable to consumers in the low-income bracket.

EABL had, for instance, indicated in August that it was banking on consolidating its spirits business for growth in 2010 through active engagement with the Government for improvement of the policy environment and the fight against re-emergence of illicit brews.

Availability of cheap and legal traditional liquor therefore means the mainstream brewers will have to examine their growth plans for possible exposure in a new market that is expected to see a proliferation of thousands of small brewers competing for drinkers in the low priced liquor market.

“We are prepared for the challenge as long as there is a level playing field,” said Tabitha Karanja, the managing director of Keroche – the Naivasha based brewer.

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

With an average monthly inflation rate of close to 30 per cent and close to half the population classified as living below the poverty line, the popularity of illicit brews has been growing steadily in Kenya, catching the attention of big brewers such as EABL, KWAL and Keroche.

Illicit brews have continued to eat into most brewers’ market share, forcing mainstream players to introduce low-priced alternative drinks to protect the bottom end of the market that is dominated by spirits.

In an underperforming economy that has eroded a large fraction of beer consumers’ disposable incomes, 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 and rural villages.

Beer market statistics indicate that an attack in the low end of the market would be significant to mainstream brewers who have in recent months been reorganizing their operations to protect their revenue streams in a market where volumes growth has plateaued out.

Ken Kariuki, EABL’s corporate Affairs director, however maintained that lifting of the ban on chang’aa would not hurt the business despite the 33 per cent drop in the sales of spirits for the year ending June 2009.

“As long as there are set production standards, let them come,” said Mr Kariuki. “We will maintain our competitive front in the branded and quality products for the low end market.”

Availability of cheap local brews could also make the climbing long and steep for the new comer in the beer market Keroche, which has set its sights on controlling between 25 and 30 per cent market share in five years.

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.

The massive increase in excise duty on locally brewed spirits at the end of last year has prompted a proliferation of low priced spirits most of which do not carry the mandatory tax stamps.

Weak enforcement has left these drinks to be sold openly to consumers most of who are attracted to them by the low prices achieved through non-payment of taxes.

The coming into the mainstream market of chang’aa is expected to be particularly bruising for Kwal, the State-owned firm that is in the middle of executing a Sh300 million turnaround plan.

That plan involves cost cutting measures such as packaging the company’s products in reusable bottles, local sourcing of raw materials, and introducing more non alcoholic product in the market.

KWAL abandoned its loss making streak four years ago to post a Sh68 million profit in the year 2005/06.

This was followed by Sh50.8 million profit in the 2006/7 before it beat its own pre-profit projection of Sh130 million for the last financial year when it instead posted a pre-tax profit of Sh148 million.

Should parliament pass the Bill which was published in the Kenya Gazette last Friday, it would usher in a new licensing regime for alcoholic drinks through repeal and modifications to the Liquor Licensing Act as well as the Chang’aa Prohibition Act.

The proposed law also seeks to protect consumers of alcoholic drinks from misleading and deceptive inducements while proposing measures to eliminate smuggling, illicit manufacturing and counterfeiting.

Critics argue the Bill could face stiff opposition in parliament and from religious groups and civil society activists.

The National Agency for the Campaign Against Drug Abuse (Nacada) is however in support of the Bill arguing such a law would herald standards in distilling the liquor, thus curbing possible deaths and health implications.

“The Government cannot control standards for something that is illegal,” said Jennifer Kimani, the Nacada national coordinator of Nacada. “If the ban on chang’aa is left to continue, people will continue to die because no one knows exactly what the chang’aa they are drinking is made of.”

A recent study by the Institute and Policy Analysis and Research (Ipar) says to hasten the production process, increase of the quantity to enhance the potency of chang’aa, the majority of producers resort to adulterating.

This has resulted in deaths and blindness to a number of consumers of the spirit, known in various places as Enguli, Kali, Kangari, Kill Me Quick, Kisumu Whisky, Kivia, Maai-Matheru, Machozi ya Simba, Machwara, Njeti and Waragi.

The Chang’aa Prohibition Act, criminalises the manufacture, sale, supply, consumption and possession of chang’aa, or unlawful possession of any implement, apparatus or utensils designed or adapted or adapted for its distillation.


04 November, 2009