Thursday, September 24, 2020

KBL wobbles as alcohol levy begins to bite

Options were this week coming to an end for Kgalagadi Breweries as the negative effects of the 30% alcohol levy were beginning to hit home.

Late last year, the company management advised staff not to panic saying they were still observing the company performance in the wake of the levy.
Internal statistics indicate that since the introduction of the levy, sale volumes have declined by up to 20%, the biggest slump being for the months of November and December, which are traditionally the peak months.
This week, the company shocked the market by announcing that as a result of the levy, the company had lost its competitiveness in some sections of its business.

Raising fears among staff that retrenchments were in the offing.
KBL announced this week that as a result of the 30% alcohol levy, they have been forced to reduce the price of locally produced mainstream non-returnable bottles alcoholic beverages.

The new development has served to heighten fears that KBL, which is an associate of SABMiller, one of the world’s biggest beverages producers, is on its last leg just as it weighs its final options before shutting down its Botswana operations.

The wholesale price of St Louis Lager, Hansa Pilsener, Castle Lager and Carling Black Label 340 ml Non Returnable Bottles which have been the hardest hit by the structurally skewed levy will as of Monday decrease from P122.18 to P96.00 (excluding VAT).
Accordingly, says KBL, the recommended prices of these particular brands decreases from P7.00 to P5.50.
“This makes this pack 24% more affordable than the 330ml can,” says the Group.

What is not yet clear though is for how long KBL will be able to keep up with the competitive disadvantage resulting from the levy, especially given that the company has in the past hinted that with the levy it would be much cheaper and more competitive for it to close down its Botswana plants, relocate elsewhere and service the country from outside as a depot.

The 30% alcohol levy was introduced last year as part of government’s efforts to reduce the harmful effects of alcohol on society. The irony of it all is that importers, who by the very nature of their business models, employ fewer Batswana and contribute less to the economy are the indirect beneficiaries.

KBL, which is the country’s leading producer of clear beer, says as a result of the levy some of its leading locally produced brands are not able to compete with importers.

The Group’s Director of Corporate Affairs and Strategy, Thapelo Letsholo, says the levy has resulted in comparable locally produced alcoholic beverages being disadvantaged compared to imported alcoholic beverages because the levy is charged on ex-factory selling price for KBL, while in the case of competitor imports it is charged on Cost Insurance & Freight on import.

This is because for importers, the levy is only collected at the point of entry into the country.

“The levy is therefore imposed even on KBL’s margin while in the case of comparable competitor imports the levy is charged only on the cost to the importer. The resultant quantum of the levy is thus significantly lower in the case of imported products,” said Letsholo.

With KBL’s competitive edge chipped away, Letsholo says the Group has been left with little option but to reduce their prices on non-returnable bottle beverages.

“On January 26, 2009, Kgalagadi Breweries (Pty) Ltd will reduce the price of its locally produced mainstream alcoholic beverages in 340ml Non Returnable Bottles (NRB) by 21%. The price decrease has been brought about by the inability of KBL to compete with its competitors in the NRB market as a result of the introduction of the levy on alcoholic beverages. The levy makes comparable alcoholic beverages cheaper than those locally produced,” said Letsholo.

He added that the structural defects of the levy manifest themselves in that the competitor importers of alcoholic beverages are able to undercut KBL pricing, resulting in consumers shifting to more affordable imported alcoholic beverages offered by competitors.

“This shatters the concept of ‘Buying Botswana’ brands and compromises KBL’s ability to continue to operate profitably, provide employment and contribute to the economy of Botswana.”
He said for it to be able to compete adequately, KBL has thus had to reduce its pricing for those packs that compete with the competitor’s offerings, which is the NRB.
But as for how long price reductions on NRBs as a strategy would sustain KBL remain anybody’s guess.

The NRBs are produced in KBL’s new non-refundable bottle plant, which was recently commissioned after it was constructed at a cost of P24 million.
When the company built the plant, it had neither factored in nor anticipated the levy, which, by all accounts, came as a surprise package as part of President Ian Khama’s initiatives.
“Until the acquisition of the plant, KBL was constrained to compete sufficiently in the NRB market due to capability. Now it is due to the levy,” said Letsholo.

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