“It is the first time in three years that we are in positive territory. It feels hugely positive.”
These are the first words coming from Hloni Matsela, the Managing Director of Kgalagadi Breweries, as we sit down for an interview to look at the financials from his group’s full year.
For the last three years, Matsela has presided over a loss making giant, occasioned by government’s decision to introduce the alcohol levy.
When we met last year, he had summarized the result by calling it a “bloodbath”.
There was no hope of a turnaround.
There were even whispers that certain voices within SABMiller who are a major shareholder were considering relocating the plant to Rustenburg so that their products could come into the country as imports as a way of circumventing the unfair manner the levy was implemented against local producers vis-à-vis importers.
While the latest financials reflect a nominal operating profit, the truth of the matter is that such figures do a lot to hide the painful reality that volumes have continued to fall.
It is perhaps worth repeating the fact that the last time we had an interview with Matsela, the alcohol levy was biting KBL more than it did other alcohol importing companies because, at the time, it was not applied evenly. Under the old regime local producers suffered more than importers.
The task that KBL faced at the time was to prove to Government as the regulator that as it stood then, the levy was 30 percent of two different things, with one set of rules for importers and the other for importers.
During that time, KBL was compelled to contend with the difficult trade conditions brought about by the levy, but also the inherently unfair structure of how that levy was calculated.
In explaining the modest improvement in his company’s financials, Matsela reaches for two defining phases.
“The levy has been in place for three years now and, like tax, there comes a time when it begins to level off. We think we are at a stage now where business has begun to absorb the shocks. But the more important component for improvement has been the restructuring of the levy. We are very grateful that when Government raised the levy by 10 percent to 40 percent the minister also announced that the levy would be applied evenly in line with what we had always said as KBL that we were unfairly treated as a local producer.”
The key result of the restructured levy has been that it is now applied at the cost of production rather than at the sales end.
This has meant that importers, who initially had a free reign as they literally and overnight pulled the rug off the feet of KBL, dislodging it from its traditional market dominance territory now find themselves having to compete at equal terms.
With a well developed infrastructure, KBL, at least from the latest results, seems to be fast regaining its lost ground.
“The upshot of it is that for the first time in three years, we find ourselves competitive and for that we are starting to see results,” says Matsela.
Everything staying equal, it can only get better with time for KBL.
Matsela adds that, going forward, the key concern for KBL will be to recapture the market share lost to competitors during the time that the levy was skewed.
While there is light at the end of the tunnel, winning back the market is not something that happens over time.
It is an onerous task that, without saying, involves new and additional investments in marketing.
It is also clear from the time that it took for the effects of the restructured levy to start feeding into the KBL bottom line that in anticipation of a market correction that was to follow the minister’s announcement that importing competitors had hoarded enough supplies that lasted months.
This was a clear strategy to prolong the spinoffs of the then cockeyed levy, at least for a little while, beyond its legal date line.
“Restructuring of the levy was not a secret. Competitors started to stockpile in anticipation of the correction and it took about three months before real change could start to happen.”
While it will take many years for KBL to be back to where it was before the levy, Matsela is particularly grateful of the Minister of Trade, Dorcus Makgatho-Malesu, who he says had always been very understanding of the difficulties that KBL faced.
“Of course, there is a level of happiness now brought about by equity in the market, but the fact of the matter is that we still have a levy in place. As a business, we are not able to perform to our potential, but we draw solace from the fact that the playing field is now level.”
Throughout, KBL has maintained that the alcohol levy was not the best model.
Without success, the company came up with different options, including introducing the exercise duty based on alcohol content.
Because the levy depresses growth, it is clear from this year’s result that even as financially KBL has made modest profits, the volumes have continued to plummet, albeit at a rate much slower than was the case during the time preceding the restructuring of the levy.
Since the levy was introduced, clear beer sales have dipped by about 35 percent, which directly correlates with the levy which currently stands at 40 percent.
“A 35 percent decline in sales performance in a business of this nature is a crisis. Ordinarily a Chief Executive would have been fired. There would be new players in town,” Matsela says chuckling.
He is under no illusion that with KBL currently at 65 percent of its previous high before the levy was introduced, bouncing back is not going to be easy.
“It has taken three long years to lose our market share. We can’t regain it overnight. It will take time to catch up.”
But is KBL not worried that Government will be tempted to pull the plug once again once KBL starts to show volumes and profits start to show up?
“There has been in the public domain a mold of an incremental 10 percent. From a business perspective that is threatening. It is our hope that the regulator will realize that far from making money, we are only recovering the market share that we had lost.”
In addition to increasing the levy further, KBL is of the view that it may also be time for a thorough analysis and review of what has since been achieved since the levy was introduced vis-à-vis the initial goals.
While KBL tried hard and fast to stick to its business model, notwithstanding the hardships brought by the levy, it is now an open secret that the company is no longer a flagship that it used to be inside the larger SABMiller stable.
Matsela says reality started to hit home when, in line with its contribution to the bigger corporation, KBL was all of sudden treated as a smaller operation.
“The pain of it is that we have had to play with discounts, not to gain market share, but maintain that which we already had. That cost us a lot of money as a business.”
He underscores the effects of uncertainty by highlighting that under normal circumstances, the company plans in a cycle of three to five years, “and when we don’t know what will happen next quarter, let alone three years down the line it becomes very difficult to do strategic planning.”
