Saturday, September 26, 2020

KBL’s Matsela losing the beer cheer

When he arrived in Botswana from Lesotho and South Africa where he had been in the alcohol industry from close to 20 years, the man at the helm of Kgalagadi Breweries did not envisage that the new assignment he was taking up would, in the wellness of time, drive him closer to politics and farther away from business, which has always been his first love.

“No, I didn’t imagine I would one day have to deal with such a situation. It has been quite a challenge,” he says somewhat passively.

The “challenge” that Hloni Matsela is referring to is the difficult trading terrain that came about after Botswana Government decided to introduce a 30 percent alcohol levy.
Since the levy, he has held countless meetings with senior government officials and top political decision makers.

Over time, the tenor of the meetings has moved away from complaining about the levy to wreaking consensus on how best to evenly and fairly implement the levy.

Matsela is convinced that, as presently computed, the levy is giving Kgalagadi Breweries a raw deal while favouring his competitors, almost all of whom are based outside Botswana.
As a result of the skewed nature of the levy, KBL has seen its volumes collapse while competition gained ground.

The net result has been equated to exporting Botswana’s jobs.
To underscore just how decidedly crucial the 30 percent alcohol levy has become to the industry, for the duration of our interview , the Managing Director of Kgalagadi Breweries keeps referring to two phases of his tenure at KBL ÔÇô there is the pre-levy period and post-levy period.
From the onset he repeatedly highlights the fact and says his company has since moved beyond complaining about the material impacts of the levy.

The concern now has shifted to how skewed and unfair the implementation has been.
“I do not think the unfairness of the levy was deliberate. I am driven by the belief that it was probably a mistake,” he says.

Perhaps aware just how sensitive the subject is within Government, he prefaces his sentence by pointing out how grateful he is that “everybody appreciates” the concerns his company has been painstakingly harking at.

The 30 percent alcohol levy was personally introduced by President Ian Khama nearly two years ago.
A self-confessed alcohol hater, initially the President had wanted the levy at 70 percent so that he could curb the ravages brought on society by excessive alcohol consumption.

But after discussions and possible pleading and cajoling by his ministers, Khama provisionally settled for 30 percent, before making it clear that he will not hesitate to increase it by a stroke of his executive order if it was determined that the harness was not working.

Matsela candidly admits that the first full year under the levy has been a “horrid” experience.
Even as the recently released full year financial results prove, the truth of the matter is that, at the most, statistics only tell half the story.

“The discussion has since moved beyond discussing the pros and cons of the levy,” he says clearly at pains to covey the message that he is no longer interested in debating whether or not the levy is necessary.

Of concern to KBL today is that the levy is not calculated and implemented equally to all the players.

“I do not think it was the original intention of government,” he says, also trying to yield some ground to the government and avoid a confrontation, which he no longer has appetite for.

He says discussions with the regulators, who are the Ministry of Trade, have shown an openness that drives him to be hopeful that it will not be long before the defective nature of the levy, which has seen imports enjoy an unfair advantage over local products, are rectified.

“We are currently discussing different models to ensure that the levy is calculated on the same basis for every one of us in business,” says Matsela.

Soft-spoken, but firm and adamant, he says the problem is not so much the levy as the fact that “it is 30 percent of two different things” ÔÇô one set of rules for importers and the other for local producers.

The results have been that KBL bore the brunt of the policy because its goods are levied at wholesale price, which includes all production items like freight, marketing and, perhaps more crucially, the company’s margins while their importing competitors only have their goods levied at the border gate, by which time they would not yet have added their margins.

Though technical, and seemingly minor, this disparity has changed Botswana’s alcohol industry.
The net effect has been that it has allowed beer importers more room space to maneuver including reducing their prices vis-├á-vis KBL’s. During the duration of the levy importers have grown in leaps and bounds while KBL has seen its market share shrink considerably.

“For locally produced goods it is 30 percent of selling price while for imports it is 30% of bringing goods up to the border post,” says Matsela.

The result has been that over the 18 months that the levy has been in place, “while we were crying our competitors have been laughing all the way to the bank”.

Statistics indicate that up until the early days of the levy, Windhoek Larger, which is produced in Namibia by the Namibian Breweries, was priced way above KBL’s mainstream brands.

St Louis, which by far used to be the most dominant clear beer brand in Botswana, has since been overtaken by Windhoek Larger and other brands from Namibia.

“It is not normal that an imported brand can surpass a dominant local brand over such a short time,” says Matsela.

He says the fact that this happened in Botswana clearly indicates that KBL competitors have a much larger room to maneuver.

The situation is made all the worse by the fact that all along, as is the case everywhere in the alcohol industry, KBL’s business model was premised on growth.

“Even stagnation would be extremely threatening to shareholders. But then you can imagine the situation when we are now talking about a decline that has been going on for that long.”
Importers are also given a shot in the arm by the fact that, unlike KBL, they do not have a huge infrastructure to support and maintain. With such a clear disparity in overheads, KBL has naturally been struggling to play a catch-up game.

While acknowledging that the last 18 months have no doubt been the most difficult in his entire career, Matsela says there is an understanding on the Government side that some remedy is justified.
“We believe our argument is credible. The good thing is that the issue has moved beyond debating validity of our argument. It is reassuring that the people in government now want to do something about the skewed nature of implementing and calculating the levy,” said Matsela.

Under normal circumstances, shareholders would have long made a decision to close the plant and enter the Botswana market from outside, as that is what makes commercial sense at the moment.
But for KBL things are not cut in so clear shades of black and white.

The company has a long history and tradition in Botswana, a sentimental attachment that makes it somewhat harder to simply turn its back and walk away.

“We are in an unenviable position. Commercially it makes sense for us to close our plant and import. But we can’t do it. What stops us is our strong belief that the current model is so flawed that our regulators will see it for that and rectify it. Our belief is that the long term is a win-win situation where we will save jobs and be able to compete in a level playing field,” says Matsela.

That said the MD is also candid enough to admit that KBL is holding on because under normal circumstances, producing locally gives them a far greater advantage. He points out that the sheer size of KBL has also helped the group to absorb pressure for this long

But has KBL scaled down its social responsibility programmes as a result?

“I have insisted that social responsibility is part of our business model. We have carried out our corporate social investment despite the hardships.”

That said he is quick to point out the programmes are no longer as sustainable as they used to be before the trading terrain changed.

“One option we have is to scale down our projects. Unfortunately the scaling down may result with some projects being so small that they will not have the impact.”

He says the question then will be to ascertain if continuing with them was worthwhile.
“That question will only be answered after we do the ultimate refinement,” he says.
From the figures, it is clear that even if Government agreed as early as this week to rectify the flawed nature of the levy, it will be some time before KBL’s parent company, Sechaba, which is listed on the Botswana Stock Exchange regains its lost ground.

Matsela does not want to talk much about the share value Sechaba has shed post-levy period except to look past me and compare events at the bourse to a “bloodbath.”

RELATED STORIES

Read this week's paper

Masisi creates his own “deep state”?

The government enclave is discussing a new law that will expand the president’s overreach and make it easier for the Directorate of...