The iron lady of booze stirs up a flat beer market

By Jevans Nyabiage

Kenya: From a small three-room factory with five employees in 1997, Ms Tabitha Karanja has built a million-dollar facility that employs hundreds of Kenyans.

But it has not been easy sailing. Ms Karanja has been in and out of court fighting to keep her manufacturing unit open. 

She has had her battles with the Government and competitors. The most bruising one with Government officials was in 2003 when more than 10 Keroche Breweries’ depots in Central Province were raided by the provincial administration.

And the rivalry in the Kenyan beer market is set to intensify this year as Keroche and other beer manufacturers increase their investment, while the dominant player, East Africa Breweries Limited (EABL), scales back.

This may appear to be a tactical retreat for the oldest brewer in the country, but the reality is that EABL is frantically trying to increase sales in the Kenyan market.

The play for the alcohol market has been made more interesting with the exit of former President Kibaki. There was a circle of powerful dealmakers around him who controlled the billion-shilling beer distribution business, especially for EABL.

Now, this clique of distributors find themselves powerless, giving competitors like Keroche and SABMiller the breathing space to wage a bare-knuckle war against EABL.

It is perhaps for most of the above reasons that Karanja now feels comfortable enough to make her single-largest investment ever this year to increase Keroche’s capacity at a time when EABL is on the retreat. 

And despite fears that drinking will reduce as a result of the much-dreaded Alcoblow, Kenya is one of the markets in sub-Saharan Africa projected to see an increase in the consumption of beer as more people climb the social ladder.

Aggressive push

And with Kenya’s Alcoholic Drinks Control Act 2010 allowing the sale of traditional drinks under regulated conditions, previously unlicensed brewers have been co-opted into the commercial segment, increasing competition.

This gives credence to Karanja’s aggressive push this year.

Keroche, Kenya’s second-largest brewer, has outlined a Sh3.5 billion capital investment to upgrade its bottling plant, which it aims to complete by November this year.

The plant should see the brewer increase its capacity from 60,000 bottles a day to about 600,000.

This could create challenges for other brewers.

Since Karanja’s 1997 entry into the alcohol market, a field dominated by powerful multinational companies and men, she has had to battle with banks unwilling to part with desperately needed start-up capital, wealthy and exclusive competitors backed by the Government, uncooperative public officials and even a shut-down of her offices.

But in a classic entrepreneurial tale, she has successful navigated all setbacks.

Last year, she was named the Woman to Watch by Ventures Africa Magazine. She has also been rated among 13 other iconic women in Africa, and has been featured on the CNN African Voices programme that highlights successful Africans.

She has made more enemies than friends in her bid to penetrate the industry.

Monopolised market

Karanja started out in the wines and spirits business through Keroche Industries.

In 2007, 10 years after entering the wine business, her business was pushed out of the market by a hefty tax hike on wines and spirits.

But she was down, not out; she saw a market in beer.

Karanja went on to launch Summit Lager in 2008. The company has since launched Summit Malt, Vienna Ice and Crescent Vodka.

“We came in after they had monopolised the beer market for 80 years. We broke it,” she said in an interview. “We have been able to increase capacity since then, and added more brands.” 

Karanja, who turns 50 in August, said Keroche Breweries received Sh2.7 billion financing from Barclays Bank for the expansion.

A number of multinationals have been eyeing the firm, but she insists that if she ever sells it, it will have to be through the stock exchange so that Kenyans can own a piece of it. She plans to list at the Nairobi Securities Exchange in 2018.

“After this expansion, our plan is to go regional and add more products, depending on customer need,” she said.

The firm has 200 staff and will add another 100 this year.

The bigger picture for the Kenyan beer industry is the fresh round of shake-ups, with new laws and tax measures threatening to dampen players’ growth prospects.

From the ban on the use of sports to advertise alcoholic products and imposition of more taxes on Senator Keg, which targets the low-income market, to the entry of multinational and speciality microbrewers, the future could get complicated for incumbents.

Kenya’s alcohol sector has experienced major realignments with the entry of new players like independent spirits importers, Heineken and SABMiller.

SABMiller has also outlined investments worth $150 million (Sh13 billion) for its East African subsidiaries over the next two to three years — $70 million (Sh6.1 billion) for its Ugandan subsidiary, Nile Breweries, to boost capacity, and $80 million (Sh6.9 billion) for Tanzania Breweries’ plants in Arusha, Mwanza and Mbeya.

As for EABL, the introduction of tax on its Senator Keg brand is likely to hit revenues. Senator Keg, launched in 2004, was intended to address the issue of illicit brews.

To push the product, the firm developed a new route to market, formalising small business that previously engaged in selling illicit brew.

The product was nicknamed by drinkers “Obama Beer” since its wider launch in November 2004 coincided with Mr Barack Obama, the American-born son of a Kenyan father, winning a US Senate seat.

“An important key to the brand’s success was the Kenyan Government’s agreement to remove taxes in the non-malted, kef-format beer,” wrote Rosabeth Kanter and Matthew Bird of the Harvard Business School.

“By doing so, lower-income citizens could afford a safer product, the State received more revenue in the form of VAT and corporate tax, and EABL turned more profits.”

This helped the firm capture the price-sensitive consumers in the low-end market.

Keg sales grew fast. Volumes grew even faster.

In fact, in 2008, Senator Keg, which was sold in glass cups as opposed to expensive bottles, overtook EABL’s jewel, Tusker Lager, in terms of volume.

But the move by the Government to introduce a 50 per cent tax on the product on October 1 last year hit sales and volumes.

The brewer increased the retail price of Senator Keg by 67 per cent to Sh45, pushing the drink out of most of its target consumers’ reach.

The brewer said the brand recorded an 85 per cent drop in volumes in the six months through to December 2013.

“Our internal assessment is that it will destroy revenue from the most important VAT tax,” Chief Executive Charles Ireland said in February, citing falling consumption, with over 50 per cent of distributors and retailers having shut down.

This weighed down on the brewer’s net profit for the first half of the financial year, which grew by four per cent to Sh4.1 billion.

In terms of sales, Senator declined 47 per cent.

During an investor briefing on February 14, EABL management said about 3,000 outlets had closed and a similar number in danger of shutting down.

“We are working to improve performance through innovation — the introduction of Senator Dark Extra and Jebel Gold, and through pricing and marketing interventions,” said Ms Tracey Barnes, the group finance director.

Alcoblow impact

But with the imposition of tax on the brand, reality has started to bite. EABL late last month announced that it is sending home 100 employees at its main subsidiary — Kenya Breweries Limited.

The firm has also announced that it is cutting production working days to five from seven at its Ruaraka-based plant to save on costs.

The first to be affected was the Senator Keg production line. The thinking is that by cutting operation days by 30 per cent, costs such as staff overtime pay, raw material orders and plant running expenses like electricity bills will reduce. It is hoped that the plan will save the firm Sh800 million this year.

There are also fears that the Traffic Department’s introduction of breathalysers has been an effective tool in reducing copious alcohol consumption, which might impact sales in the core Kenyan market.

“More rigorous Government control on alcohol consumption has been shown to be effective in reducing consumption,” said Standard Investment Bank in a February research note.

EABL plans to launch several new products and remodel its distribution chain to shore up revenue. Last year, it unlocked its potential by wooing female drinkers with Radler, a beer made from malt and lemon, in a bid to expand its market share.

This is in addition to its existing products that are popular among female drinkers such as Smirnoff Ice and Tusker Malt Lager.

Its rival, SABMiller, similarly launched a new brand in the market, Redds Vodka Lemon, a unisex brand, adding to its Redds product offering.

However, analysts say there is room for growth for brewers in the region. This explains why SABMiller is interested in this market with its re-entry, as well as Heineken’s heightened marketing activities.

According to a report from advisory firm KPMG, Africa’s Consumer Story, Africa could in the next few decades witness an increased market for beer.

A more educated cohort of young people will enter the labour market, leading to the rise of a wealthier middle class that will fuel growth in the services industry, it notes.

African beer consumption was estimated at 108 million hectolitres (a metric unit equal to 100 litres) in 2011, with three countries — South Africa, Nigeria and Angola — accounting for 51 per cent of this.

Spending on beer

“As people move up the income ladder, per capita spending on beer rises significantly. There is a very high growth rate in per capita spending on beer in the $1,001 to $2,500 category [Sh87,000 to Sh217,000],” KPMG says. 

In this bracket, informal trading still dominates the market, but a gradual shift from traditional beers (such as sorghum-based beers) to clear beer starts occurring.

Further, Old Mutual Securities Research, in a note to clients last year, said investors appear undeterred by what appears to be EABL’s sluggish performance.

“Investors seem to be positioning for a very long-term play when buying into EABL despite the valuation. Kenya’s demographics make the alcoholic beverages industry very well poised to benefit over the next decade.”

The analysts say that with EABL positioned across East Africa, the company’s profile improves even further, giving investors wide geographic coverage in an region with a growing middle class. The combined population of Kenya, Uganda and Tanzania stands at about 120 million people.

Old Mutual researchers said with EABL, investors are buying exposure to the African consumer and anticipated growth.

“With over 80 per cent domination of the formal alcoholic beverages market in Kenya alone, it’s clear that competitors can only follow in EABL’s wake.”

Barriers to entry

The brewer towers well above its competitors in the domestic market in terms of brand, positioning and distribution, but there is still the SABMiller threat that lurks following the termination of the Brewing and Distribution Agreement that the two companies had for Kenya and Tanzania.

“The barriers to entry into this industry are many for new players, as Keroche Breweries has felt in Kenya, taking years to gain visibility or any amount of dominance,” Old Mutual added.

Further, the informal beverages segment, which makes up about 50 per cent of the alcohol market, also comprises mostly low-income earners.

However, as the economy continues to thrive and demand for labour grows and new jobs are created, the incomes of this demographic are expected to increase.

For EABL, there is room to grow regional subsidiaries in Uganda and Tanzania as the Kenyan market nears maturity. 

The brewer said that during the first half of its financial year, the Ugandan market, which has long been sluggish, rebounded, posting a 17 cent rise in sales.

In Tanzania, where it entered through the acquisition of Serengeti Breweries in 2010, sales dropped by 11 per cent, mainly due to the firm shifting to a new, dedicated distribution network to cut reliance on independent wholesalers.

The brewer also has to contend with SABMiller’s Tanzania Breweries dominance, which stands at 70 per cent.

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