E-Malt.com News article: Kenya: East Africa Breweries increases prices of selected beer brands to cover rising raw material costs

East Africa Breweries Limited (EABL) has increased the prices of selected beer brands to cover rising raw material costs and grow sales in a market where consumption volumes have remained flat, Business Daily reported on April, 8.

The brewer announced price increases of between Sh5 and Sh10 per bottle, citing rising production costs, but analysts reckon that EABL is geared more at growing sales in a bid to reverse the drop in half-year profits and cash.

EABL is facing threats on its sales in the Kenyan market as the country settles to the new alcohol law that reduces the number of hours bars can operate, besides limiting estate businesses and legalising traditional, often cheap, liquors.

Beer distributors said sales had fallen by double digit, but EABL is yet to report on the impact of the new alcohol laws on its sales.

“While costs are up, the price increments are mainly meant to cushion against the drop in volumes brought about by the alcohol control Act,” said Mr Wycliffe Masinde, an investment analyst at Kestrel Capital Limited said.

In effecting the price increase, EABL executives are working on the understanding that most consumers who are feeling the heat of Kenya’s soft economy have fallen off the company’s radar and that any cutback in consumption that may arise from the price adjustments is unlikely to affect sales.

“The adjustments were restricted to premium brands that have proved to be very resilient,” said a senior marketing executive at EABL.

Affected brands include Tusker, White Cap and Guinness while the low-end brands such as Senator, President and Allsops were not unchanged.

Analysts estimate that the price increment could add nearly a billion shillings to the brewer’s top line at current consumption levels, but warned of a bumpy ride to the realisation of double-digit profit growth that shareholders have become familiar with in the recent past.

They see the latest price adjustments as an admission by EABL that price and not volumes will be the key driver of growth this year, arguing that the firm has in the past resisted attempts to increase product prices from an operations standpoint, but only on tax increments.

This will be the third price increment over the past 18 months of between Sh5 to Sh10 per bottle it made in October 2009 and another after the June Budget to cover for tax increments.

The brewer hopes additional cash from the price increase will help offset rising input costs such as barley, hops, utilities (water and electricity) and transport.

Global commodities data shows that the cost of barley, the brewer’s main raw material, has increased from $145 per tonne in June to $196 in February.

The firm saw the half year net profits for the period ended December 2010 drop to Sh4.1 billion from Sh4.2 billion as rising administrative expenses ate deep into sales — which grew 10 per cent to Sh20.4 billion over the period.

The financing of Tanzanian brewer buyout and dividend payments, which each took Sh4.9 billion, in the half coupled with a 24 per cent drop in cash generated from operations, reduced the brewer’s cash to Sh2.6 billion in December from Sh7.9 billion in July and Sh8.2 billion in December 2009.

The impact of the new laws did not show in these results as it only affected a month’s sales, but analysts say it will in the second half reports and full-year earnings.

The new alcohol law does, however, legalise traditional liquors that will be subject to health standard controls.

Its time restrictions limit bars to serving alcohol between 5 p.m and 11 p.m. Previously bars operated for 24 hours.

EABL share price on April, 7 stood at Sh195 at the Nairobi Stock Exchange compared to Sh194 on April, 6 and it has remained stable over the past six months against expectations.

Besides the price increments, EABL is looking at trimming its administrative and distribution expenses and getting a larger share of the Ugandan, Tanzanian and Great Lakes markets in an effort to reduce its over-reliance on the Kenyan market.


08 April, 2011