Regulatory Environment

Kenyan has relatively high taxation regimes for the formal beer industry. Standard VAT levels are at 16% while excise duty averages about 12%. Consolidated taxation including; VAT, excise duty, and corporation tax consume about 70% of net revenues. The business is generally high margin but rising taxes are impacting on revenues.

Recently, a low-end beer brand, Senator Keg Lager was slapped with a 67% excise duty. This move almost doubled its retail price and massively affected brand volumes. Corporation tax has been stable at 30% which has ensured relative stability. Ease of trading through the EAC (East African Community) has been beneficial in moving products.

Market Performance

The Kenyan beer market has been expanding rapidly with EABL having tripled its net revenues over the past decade. In the past three years, revenues have surged from $521 million in 2011 to $685 million in 2013, a growth of 31.5% (EABL, 2013). Market capitalization was about $633 in 2012 but has since risen to the present level of $2.4 billion.

This has been hugely beneficial to Diageo since dividends have been rising and it did not need to invest additional funds until the recent inject to fund the 20% acquisition in KBL. In fiscal 2013, it received $25.2 million in dividends. Effectively, Diageo has quadrupled the value of its investment in EABL plus annual dividends that it receives from the operation.

Market Challenges

Cultural dynamics usually influence market growth of any company that is expanding overseas. However, Diageo eliminated the challenges that are experienced by firms that fully acquire firms as it just overseas operations in the market through its regional head. Concepts that drive business are driven by local talent which has enhanced the success rate of the firm.

Regulatory challenges have increased in the market directly affect volume levels. In 2011, a law was enacted that drastically the reduced duration for pubs to only 8 hours during weekdays and 10 during weekends. This effectively affected the distribution of low-end beer and spirits as the limited opening times reduced overall demand.

Road infrastructure is still generally weak as road maintenance has been lackluster. This has a direct impact on its distribution networks and increases the operating expenses. The government has always targeted the beer and cigarette industries during annual budgets as the main source of increasing government revenues.

This always puts pressure on retail pricing and affects margins. In some instances, EABL and other firms absorb some of the tax adjustments. In recent times, the adjustment has become rather arbitrary such as the taxation of Senator Keg Lager. This has a direct on capital expenditure to improve distribution efficiency.

There are political risks associated with the market as witnessed in the 2007/08 which had a negative impact on the general economy. It slowed down demand for entertainment-oriented products such as beer as surging inflation rapidly increased the price of basic commodities. It also increased inputs costs for EABL especially for its barley and sugar.

Unemployment levels continue to remain stubbornly high especially among the youth. This has dampened potential from the burgeoning group especially for its premium products which are increasingly being priced out of the affordable range even for the middle-class. Price in the industry is shifting faster than incomes can rise especially in the major urban cities.

Effectively, there are some market uncertainties in Kenya especially as far as the regulatory environment is concerned. Arbitrary tax increases seriously impacts business planning and affects volumes and margins. There is generally political stability that has been boosted by the approval of a new constitution in 2010.