How weak shilling hit EABL profit

While regional liquor maker East African Breweries Limited (EABL) defied higher taxation and depressed consumption to post a rise in sales and revenue, the shilling depreciation and high operating costs weighed down its net profit in the half year to December 2023.

The brewer’s post-tax profit dropped 22 percent to Sh6.7 billion from Sh8.7 billion last year, even though its net sales rose 16 percent to Sh66.5 billion.

Read: EABL cuts dividend as profit drops 22pc

The profit cut was mostly driven by foreign exchange losses in Kenya, which cost the firm Sh2.3 billion, a more than ten-fold increase compared to a similar period last year.

EABL chief financial officer Risper Ohaga said the company’s forex-related losses were, in addition to depreciation of the shilling, largely due to a rise in its input imports, mostly grains and ethanol, which were both made scarce by the long drought that dampened harvests in East Africa over the period.

“It’s attributable to a shortage of factor inputs locally, that is forcing us to import and that’s also creating more pressure on forex,” Ms Ohanga said during the investor briefing on Friday.

“An example is ethanol, which we previously sourced almost fully locally and now we’re importing nearly 70 percent of that and that hurts on the foreign exchange line.”

The scarcity of locally sourced inputs increased the brewer’s cost of sales by 21 percent to Sh37 billion, up from Sh30.7 billion in the previous period.

Read: Spirits imports decline as higher taxes hit demand

Input sources

EABL has been sourcing over 80 percent of its inputs, including barley, wheat, sorghum, and other grains, locally, but last year’s drought dampened farmers’ harvests, forcing them to bring more inputs from abroad.

Jane Karuku, EABL’s chief executive officer said the regional firm will now focus on boosting cost efficiency to bring down the overheads in the second half of the year.

“Cost-efficiency can come from buying better, negotiating better from our suppliers, operationalising better within our manufacturing sites, and taking care of how our own operational costs are,” she said.

“We need to keep expanding our margin because there’s a big challenge of costs, we must be cost-efficient as a business and we must do everything else we need to do to ensure we’re growing our margins.”

Read: Farmers in Kirinyaga reap from EABL sorghum deal

The brewer is also betting on increased marketing spend and a series of new beer brands being introduced in the Kenyan market to accelerate its profit growth in the second half.

EABL increased its advertising and promotions budget by 16.5 percent to Sh6.1 billion in the six months to December.

“We will remain consumer-centric and execute brilliantly to keep up with the dynamism in the market,” Ms Karuku said, adding that it is their investments in marketing that enabled a rise in sales despite the difficult economic conditions.

Ms Karuku said the drop in profit could have been worse had taxes increased again.

“We would have been in so much trouble, we would have hurt from a top line, we would’ve hurt from forex, and it would have been a disaster for the business,” she said.

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