Sechaba Brewery Holdings Limited continued to record profits despite a hostile operating environment occasioned by the ever increasing alcohol levy and traditional beer regulations, which have practically crippled the brewer’s opaque beer business.
When announcing the group’s financial results for the year ended 31 March 2014, Kgalagadi Breweries Limited (KBL) Managing Director, Johan De Kock revealed that the brewer’s profits have dwindled from double digit growth in the last year to single digit growth in the current year.
He said total volumes for the year were in line with the prior year, while the group’s turnover increased by 6.5percent from P1, 74 billion in 2013 to P1, 86 billion in 2014, largely due to excise tax, levy and price increases. KBL’s production cost saving initiatives continued to bear results as the group recorded gross profits of P855 million, up 13.5 percent from P754 million in the prior year. However, operating profits increased marginally by 7.3percent to P440m, mainly due to increase in depreciation charges related to further capital expenditure during the year and the opaque business re-organising its route-to-market. Income tax charges rose because of a hike in deferred tax on the increase of returnable containers in the business while profit after tax rose 7.4 percent to P435m.
With no indications that government will backtrack on increasing the levy every year, Sechaba has resorted to investing on improving its infrastructure and production machinery so as to extract costs from the production line. The group invested P89m in a new non-returnable bottle line and a further P55m in a new PET line. P46m was spent on containers, P30m on warehouse extensions and a further P12m on coolers. De Kock explained that consumers now prefer the returnable 750ml bottles as they are looking for value for money. Additionally, on the non-alcoholic beverages side, the brewer has also had to install a new PET line which has also heightened the need for more space, thus the expenditure on warehouse extensions.
KBL’s opaque beer brands, Chibuku and Phafana, continued on a downward spiral as traditional beer regulations piled pressure. Opaque beer dropped 11 percent as the traditional beer regulations, which are widely considered more harmful than the alcohol levy, hit hard on the brewer. The opaque beer business, which is targeted at the lower income market, started declining when the regulations barred the selling of Chibuku at homesteads.
“The regulations barred us from delivering opaque beer to the consumer’s door. Our customers can’t afford to travel long distances to reach the product and they have now resorted to illegal homemade brews. Additionally, our efforts to set up more depots or beer gardens have not borne fruit because of unavailability of land,” said De Kock.
To increase value for money for consumers, the brewer had to introduce new 20 litre and two litre packs, which helped to boost volumes. KBL was forced to close down its Palapye plant because of low sales volumes. The brewer has also pulled out of its joint venture project with Alliance Beverages, through which it would export opaque beer produced at the Lobatse plant to the North West province in South Africa.
“After about six months we re-looked at the numbers and realised that the growth that we had anticipated was not forthcoming. We therefore decided to pull out,” said De Kock.
However, KBL will keep using the Lobatse plant, on which they invested P7 million, to foster growth in the 2litre and 20 litre packs. However, De Kock is not worried about the expenditure because the plant can be picked up and used in any of SAB Miller’s operations in the continent. St Louis lager also declined by 11 percent, but is showing signs of renewed health and stability. The mainstream lagers, particularly Black Label and Castle Light, continued to show resilience and gain momentum on the back of the on-going success of 750ml RB pack.
“Carling Black Label and Castle Lite continued to lead the recovery in market share and they limited overall volume decline. We will be making new announcements on St Louis and St Louis Export and we expect the brands to rebound and start showing signs of growth,” said De Kock.
However, Sechaba recorded a decline of 13 percent in AFB volumes, due to increased competition from other brands like Savannah. De Kock explained that this was because KBL has been struggling to get Reds out of South Africa. But he gave assurances that the situation will now stabilise as the group will soon become self sufficient enough to mount competition of its own.