The country’s President Uhuru Kenyatta has singled out young people going out and drinking alcohol as a factor that has caused the virus to spread. Sales of alcohol in restaurants are currently banned and any business that does sell alcohol can only do so until 7:30 p.m.
After steep initial declines in March and April, overall sales in Kenya had bottomed out by June, says Ohaga, who joined East African Breweries (EAB) from Barclays Africa in February. But “customer behaviour will not bounce back soon and neither will their pockets.”
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Outside Kenya, EAB’s markets are in Uganda, Tanzania, Rwanda and South Sudan. Despite falling beer sales, EAB has been able to sustain growth in spirits sales in all its markets. In Kenya, she says, this is due to the fact that beer is usually consumed in public and is less likely to be taken home. “Spirits are more portable.”
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Excise duties in Kenya were a constraint on beer sales that predated COVID-19. Ohaga would like to see them reduced. The duties are inflation-linked, which mean that the cost to the consumer rises every year. Yet workers do not always get pay rises in line with inflation, she says.
- Two-thirds of the cost of a regular Kenyan beer is excise duty, she says, while noting that there are some concessions from the government on low-cost value beers, such as EAB’s Senator Keg.
- Duties on spirits are lower. The government has focused on beer as consumption is more widespread and generates more revenue than spirits, she notes.
- That raises the prospect of greater segmentation of the Kenyan market, with more people either trading down to cheaper beers or trading up to spirits.
Earnings Outlook Clouded
EAB is the region’s largest beer brewer. The company, which is majority-owned by Diageo and which trades on the Kenyan stock exchange, is focused on breaking even or making a profit, and has cut all its discretionary spending, she says.
Earnings for first half of the year fell short of analyst expectations, despite a profit warning from the company in May.
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- There is no way of knowing if the current full-year analyst consensus for EAB is accurate or whether it will need to be revised, says Ohaga.
- Analysts “will struggle” to get it right given the uncertainties over COVID-19. “We really can’t tell” if their current forecasts are accurate. The current consensus, she said, is for a fall in sales of 5% for the year to June 2021.
- As a result of the pandemic, bank borrowing is now at the limits of what the board agreed before COVID-19, she adds.
- Ohaga sees no current need for new funding, but “if we did need more the conversations are open with our bankers.”
- The company in June omitted its final dividend and Ohaga says she did not know when dividend payments will be resumed. Financial planning, she said, is currently on a quarter to quarter basis.
- Capital expenditure in 2020 will be at about two-thirds of its 2019 level, with Ohaga saying that the spending is “delayed rather than cancelled.” So far, the company has not needed to cut the workforce or salaries and Ohaga says it has no plans to. “We see an upturn as soon as restrictions are lifted.”
Bottom Line
More affluent consumers in Kenya may be at the start of a long-term shift away from beer and towards private consumption of spirits.
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