Manufacturing

The Company

East African Breweries Limited (EABL), Diageo’s brewing powerhouse, is the leading producer of alcoholic beverages in the East African region and the second-largest listed company on the Nairobi Securities Exchange by market capitalisation (KSh229bn, $2.6bn). With operations in Kenya, Uganda and Tanzania, 42.8% of EABL is owned by Diageo Kenya, 4.6% by Diageo Holdings Netherland’s BV, 2.6% by Guinness Overseas and the remaining 50% is split among more than 25,000 shareholders on the securities exchanges of Kenya, Uganda and Tanzania. EABL has a combined installed capacity of 10m hectolitres (hl) across the region with production at 6m hl in 2013, representing a 60% capacity utilisation.

In a move to capture the Tanzanian market, EABL sold its 20% shareholding in Tanzania Breweries Limited (TBL) through a public offer in 2010 and acquired a 51% shareholding in Serengeti Breweries Limited (SBL). TBL is 53% owned by SABM iller, which handled product distribution for EABL. EABL leveraged the purchase of SBL which drove up the debt to equity ratio from 0% in 2010 to 28% in 2011. The acquisition of SABM iller’s 20% equity stake in Kenya Breweries Limited (KBL) in 2011 drove it to 467% in 2012.

EABL’s portfolio include mainstream, lower segment and imported premium brands. The key revenue drivers include the flagship beer Tusker (commands a 30% share of the Kenyan mainstream beer market), Bell lager in Uganda and Serengeti in Tanzania.

EABL is expected to benefit from the region’s growth potential: it has an average per capita consumption of 11 litres compared to Latin America and North America’s average of 50 and 70 litres, respectively. 45% of the region’s population is below the legal drinking age of 18 years and around 50% of the alcohol industry is informal. The growth is likely to be boosted by strong macro-economic development in the region supported by a relatively stable political environment, discovery of oil and gas resources, increasing export activities and infrastructure development.

EABL is highly susceptible to regulatory risk, increasing competition and rising costs. The brewer achieved a 6% growth in sales in 2013 despite a decline in sales in Tanzania attributable to a 25% rise in excise duty coupled with softening of consumer demand in Uganda due to an economic slowdown. The company also invested in a KSh6.5bn ($74.1m) capital expenditure (capex) programme in 2013 that included a new packaging line in Uganda, a yeast recovery plant in Kenya and expansion of the warehouse at KBL.

The government introduced a 50% excise duty in October 2013 on Senator Keg beer – a product targeting the informal drinking sector – further slowing down overall demand. EABL announced during the release of its half-year results in February 2014 an 85% decline in sales of this emerging brand, closure of 3000 Senator distribution-outlets and reduction in brewing operations at its Nairobi plant from seven to five days a week. The political unrest in South Sudan in December 2013 affected the firm’s international operations, slowing down export sales. The results were immediately reflected in the stock price that declined to hit a 12-month low of KSh0.219 ($0.002).

Development Strategy

Amidst a challenging operating environment, EABL has turned its focus to reducing key cost drivers to achieve growth alongside its capex expansion programme. In a bid to remain competitive, new products have been commissioned in Kenya, a new depot has been installed in South Sudan, in addition to the construction of new warehouses in Kenya and mash cookers in Tanzania. This is all reflected in the KSh4.5bn ($51.3m) capex in the first half of financial year 2014.

EABL is planning to save KSh800m ($9.1m) by implementing changes to its route to consumers in order to maximise efficiency of its supply chain as it engages local barley and sorghum farmers to achieve cost of sales efficiencies. Pricing and marketing interventions are being carried out to achieve sales growth as seen with the Bell brand campaigns in Uganda.