Eveready’s powerful light is dimmed by creative technology

Kenya: Last week’s closure of battery maker Eveready East Africa did not come as a surprise to many. The firm, associated with tycoon Naushad Merali has been on the ropes for a while.

The firm blames cheap illegal imports, particularly from the East that hurt operations at the Nakuru plant, making it economically unviable.

Its management said the plant was running at 25 per cent of its capacity. But the battery maker’s fate, analysts will tell you was sealed decades ago. Or still, more than 50 years ago, when the late Harvard don, Joseph Schumpeter predicted published his ‘creative destruction’ theory.

He predicted how “the gales of creative destruction” would replace one technology with another. Through creativity, new inventions render previous technology irrelevant. Simply put, Schumpeter argued that by being innovative, it was possible to spawn new products or services that “destroy” existing ones.

The gramophone was left for the cassette player, which gave way to the CD player. Now we have the Ipod and Ipad. E-mail has left Posta flat-footed. According to Dr XN Iraki, lecturer at the University of Nairobi, School of Business, it was only a matter of time before the firm closed. “The rate at which Kenya is being connected to the grid means there is less demand for batteries. That market will continue shrinking. Have you noticed that a lot of electronic equipment such as cameras are now recharged like phones?” asks Iraki.

He adds, “As other types of batteries get advanced and cheaper, Eveready’s market became more savvy. It became victim of Schumpeter’s gale of creative destruction. Eveready behaved like Posta who did not realise email would kill their business. They should have diversified into solar or more modern batteries. The future of dry batteries is not very bright courtesy of innovations and more electricity generation,” he adds. 

Welcome and timely

Aly Khan Satchu, investment analyst believes the move by Eveready to shut down its plant is welcome and timely, as it will unlock shareholder value. “What Eveready has done is to appreciate that it’s all about shareholder value creation. The switch from manufacturing into real estate will unlock value,” Satchu says, adding that Eveready is looking to cash in on real estate gains.

He says there are another 10 companies at the Nairobi Securities Exchange (NSE) which could make a similar move. “There are plenty of companies (agricultural ones) where a lot of value could be unlocked by doing something similar to Eveready.”

Eric Musau, research analyst at Standard Investment Bank, says apart from obsolete technology, there just wasn’t enough scale in Kenya to produce an affordable product.”It is a pity because as a country, we need to ensure that manufacturing companies thrive. They tend to have long supply chains that support quality jobs,” Musau says.

“The company has a prime real estate location and depending on designs and future plans could form an important expansion location for Nakuru town. This could provide shareholders with an upside depending on execution, funding mechanism and the market rates for rent and/or sale.”

With regard to batteries, the company now plans to transform into a distributor of ready-made imports sourced from the affiliate of the US firm Energizer in Egypt. It joins a long queue of manufacturers including  Procter and Gamble that took the same option 13 years ago.

“The decision was informed by the 20-acre prime location on which the factory sits as this will be the site for the company’s flagship investment. Kenyan developers have in the past witnessed double-digit returns driven by increased demand for residential and commercial properties,” said Standard Investment Bank in a note to its clients.

But for its 99 employees, it’s back to job hunting. Many Kenyans can remember with nostalgia the iconic brand with its Shika Paka Power advertisements of yesteryear.

Despite its tribulations, Eveready is among the blue-chip firms that brought optimism back  to the stock market. In 2006, the battery maker’s initial public offering (IPO) was oversubscribed by a massive 800 per cent.

When it listed then, there was confidence with all the indicators of a market on a roll. This was manifested in a price rally that saw all the companies that listed during the period being oversubscribed by huge margins. The biggest losers are the retail investors who snapped up 65 per cent of the offer back in 2006.

Of the almost Sh600 million the investors paid — netted off from the Sh4.7 billion offered in the heavily oversubscribed issue — the value has plummeted. In the full-year to September 2013, Eveready East Africa’s net profit fell 58.7 per cent to Sh44.1 million from Sh70 million the previous year.

Over time, the stock has lost its value. Two years ago, it touched a depressing low of Sh1.50 down from the issue price of Sh9.50. On Friday, Eveready shares closed the week’s trading at Sh4.10, about 39 per cent higher than Monday’s opening price. This could be a pointer that shareholders could be buying into the firm’s strategy to close down the plant and to concentrate on real estate.