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East African Breweries Limited (EABL), the parent company of Uganda Breweries Limited (UBL), recently announced its financial results for the year ended June 2024. Please take a couple of minutes to give us some highlights and the drivers of the financial report.
Andrew Kilonzo: Yes, we have just finished our financial year. EABL, our shareholder, which is listed on the NSE and cross-listed here too, just announced a good year. We had a good year; we grew 12% (net sales value) on the back of the market issues. We were able to add value to EABL as a business, and we are very proud.
Editor’s Note: UBL contributed 21% of EABL’s net sales value last year and is the second-largest operation after Kenya Breweries Limited.
We are seeing many changing consumption trends in the industry, some influenced by COVID-19 and others by upward movements in incomes. Some consumers are seeking to graduate from consuming one beverage to another. What are some of the trends (consumption) you’ve been seeing?
Emmy Hashakimana: If you look over the last four years since COVID-19, the economy has picked up. There’s really been growth. With that comes a lot more affluence, so we’ve seen an increase in affluent consumers. But also importantly, what we’ve seen is a trend around people reaching up. So every once in a while, when they have a special occasion, they would like to have something very good ⏤ , which is really growing premiumisation. So, premiumisation is a big trend that we have seen. It is also partly being driven as well by lots of travelling Ugandans who now have a global perspective; with social media coming through as well, there’s a lot of awareness of what’s out there, and there’s a demand to have it here.
As UBL, we’ve been making sure we have the right portfolio across both beer and spirits and all the price points. Availing that portfolio is really important, and that’s why we’ve been getting to a lot of innovations. The second thing we’ve been doing is making sure that our products are available. It’s one thing to have it here at the brewery, but it’s important that we also have it across the country. Thirdly, it’s also important that we communicate it with our brilliant marketing team, ensuring that there is better awareness, not just awareness of the brands, but also how to consume them well and consume them more responsibly. We have a budget that is set aside for responsible drinking. Last but certainly not least, we work with different stakeholders to ensure we have the right market conditions.
So, with the right portfolio available, we are working with the stakeholders, especially the government, to ensure that we have the right conditions for consumers to access the products.
One of the things that’s been highlighted by recent industry reports is the fact that 65% of the alcohol consumed in this country is either unrecorded or illicit. How big of a challenge is that because 65% of anything is big?
Emmy Hashakimana: It is a huge concern for us as well. It is also good that you had an opportunity to walk around the brewery, and you saw the amount of work that we actually undertake to ensure we have quality products. We recently won the Diageo Brewery of the Year recognition. So quality is extremely important for us, mainly because of our consumers, because for us, it is not only about consumer satisfaction, but consumer safety as well. With 65% of the alcohol consumed being illicit, that means it’s not regulated. That also means in terms of quality, there are no guarantees of what consumers will consume. That’s one of the biggest concerns that we have and obviously that taints the whole industry as well. Sometimes, you will see negative reports on alcohol use; chances are that it is actually the illicit alcohol that’s causing this. So consumer safety is very important and critical for us.
The other thing as well is loss of government revenue. If you look at the Euromonitor Internaltional report, from 2021, USD458 million is actually lost in uncollected taxes. You can imagine what that can do for the economy- and that is direct. We’re not even speaking about some of the indirect benefits that formal companies offer such as lost investment. When people are looking at sectors to invest in, both local and foreign, they also want to make sure, they’ve invested in an industry where there’s a level playing field. So there’s quite a bit of investment that we may be missing out on because of the lack of level playing for investors.
Having a level playing field also encourages innovation- innovation to make sure that we are innovating to even get prices lower. So, consumer safety, not getting the right levels of investment, lost tax revenue, and lost innovation are some of the things you lose by 65% of the industry being illicit.
Andrew Kilonzo: It is important to actually conceptualise that 35% formal alcohol is not Uganda Breweries alone, but everybody and everyone that’s organised and regulated by government bodies such as Uganda National Bureau of Standards (UNBS), Uganda Revenue Authority (URA) and the National Environmental Management Authority (NEMA), all those authorities that are with us at every opportunity to regulate- is only 35% .
So, when there are narratives going around about the high consumption of alcohol in Uganda, and I remember asking the people who would send me those messages that Uganda is the number one consumer of alcohol, I would ask them, “But are we the number one producer?” We are not even in the top 10. So what are they consuming? The truth is that it is the other stuff that is informal and illicit.
That is why we have been saying that unless the informal sector is brought into the fold by ensuring that we’re able to maximise the utilisation of formal products manufactured by regulated industries, the tax opportunity that we are throwing up is a real big one. If 35% is all of us that you know in the industry, if it was 100%, there would be three times the number of industries and it could be more. So you can see the scale of what we’re saying is immense, and the independently verified facts speak for themselves. It’s an opportunity.
I think anecdotally, I would say the one market where an informal alcohol industry was not allowed to establish itself is South Africa and because of that, the alcoholic beverages industry is one of the biggest industries. One of the companies there, was able to buy up almost all the breweries in Africa, except for Diageo companies. It is because of the revenue that they were able to generate from formal business in a market where the regulator also supported industrialisation. The benefits of regulation are there to see⏤ making sure that you’re providing citizens something that is legitimate, regulated, and fit for human consumption. At UBL, what we are giving people to celebrate their lives is very critical, and that’s why we always talk about “drinking better and not more”.
You’re currently paying more than UGX430 billion shillings in tax every year off being one of the players in the 35% registered and regulated alcohol industry. However, it is also important to point out that the current exercise tax environment is limiting because it has a big impact on people’s wallets, as you have to transfer a big chunk of the tax component to the final consumer. How does that affect the rest of your value chain⏤ the farmers, your suppliers, etc?
Andrew Kilonzo: Yes, there’s a big impact we have, and I believe our relationship with the government has been very progressive and positive. But of course, the government has pressures to generate revenue, and we try to understand the times and why the decisions are made. There is a real intention to increase the net revenue and that is for the government to do. We leave them to that; all success to them.
As Uganda Breweries, our purpose as a business is about celebrating life every day, everywhere, and it’s not just about the final point, we also want to celebrate life at the start point. So we have a robust farmer engagement program. We have been looking to work at the grassroots with farmers by providing them with technical capacity. One of the ingredients we use, for instance, is barley; barley is a crop that you grow to sell to the brewery. So we work with them, hand in hand give them access to agricultural extension officers to help them. We give them good seed and we are working with the National Agricultural Research Organisation (NARO) on seed selection and performance. Over the years, we have improved yields for our farmers especially at the grassroots. In there, we also bring in our inclusion and diversity agenda; we work with female farmers, consolidators, and there is a whole chain. There are farmers for barley, and other crops like sorghum, which we also use. It’s a more hardy crop. It can be grown as a cash crop, in areas where previously they did not have a major cash crop. Our Sorghum is different from the regular sorghum that you find anywhere. We need white Sorghum so that it doesn’t impact the colour of the beer. It is a very sweet sorghum, so the birds love it too also. So the farmers had to learn how to combat the birds.
We have been doing that journey for a long time, under our local raw material (LRM) policies, which were put in place by the NRM government. We have been investing behind that. There is a whole science around supporting farmers⏤providing seeds, getting the results, working with NARO to improve the yields, and that’s part of the benefits of industrialisation- you can invest into farmer solutions at scale to impact people at scale.
We’re very excited when the NRM government came up with the Parish Development Model because that’s the place, that’s the scale where we work. We are in the parish, working with farmers, collecting, consolidating, consolidating further, cleaning, processing and bringing to our factory to brew. We have the factory here, but we have a whole infrastructure, ecosystem and chain behind us- the transportation, the storage, the cleaning etc. Finally, when you get the beer coming out of here from the Diageo Brewery of the Year 2024⏤ the best brewery in the world, providing product liquid of global standards⏤ the packaging the liquid and selling it, there is a whole other chain of transporters, distributors, retailers and so on.
We are the only business in Uganda that plays across all categories of alcohol, not just beer. We’re very happy this last budget, beer taxation, was largely held or improved, to allow us to develop new categories of beer. Unfortunately, there was not so much latitude provided for the spirits. We continue to work with the technocrats to show the value that if you’re truly going industrial, you’re looking to go into- distillation, storage, transmission and so on and without industries of our type, you know, the country would lose out on a skillset that is beyond the brewing space. We for example work with distillers across the country, we have been able to work with our key suppliers to improve their quality of dentaured spirit to global standards. Because we are always about standards, our suppliers have become the source and suppliers for other countries, because once you have met our standard, your product can be bought by anybody, globally.
We have doubled our cassava intake as well and we are trying to see, how can we also support farmers in different other raw material sso that we include everybody in this industrialisation opportunity. If you include maize in the raw materials that we are using, we are touching at least 50,000 farmers. We are buying maize off the market and working with consolidators to ensure we can get the right quantities and quality from the market. It’s very exciting. That’s what energises us every day, because we know the impact we are having.
UBL was appraised to be the best brewery in the world for many reasons, including innovation. I’m aware of innovations like Uganda Waragi Coconut, Uganda Waragi Pineapple etc. What else are the customers asking you for and how are you making sure that that they are getting it?
Emmy Hashakimana: So innovation for us is a combination of checking what consumers are looking for, so we do a lot of research annually, but the other part is also anticipating some of the trends and the direction that the consumers will be going. One of the big things we’re seeing is that there’s a lot of exploration going on. Linked to that, another key shift we have seen with consumers in Uganda is that they’re becoming more occasion-led. While ago, you would say this is a Bell Lager drinker- but what we are seeing now is that the consumer is becoming more occasion-led. On a Monday, at 5pm a consumer will have a Tusker Lite becuase they have to work the next day. But the same individual on a Friday evening, maybe he is out with friends and having a good conversation in a different environment may take a Johnnie Walker. The same individual, on a Saturday night, they are probably out on a date and would like to impress; they are going to buy Baileys for their date and maybe buying something different for themselves. The same individual at a wedding may try something else. It is the same consumer but with alot more exploration. So we are now a lot more about the occasions.
Specifically on the trends, I mentioned earlier, Ugandan consumers are now beginning to have a bigger international outlook. They can see what’s happening across the globe, and they are demanding what’s out there. They would like to have it here, too. Some of our innovations this year include Don Julio Blanco, Don Julio Reposado and Don Julio Anejo. There is also Don Julio 1942, which we shall be bringing in officially later this financial year.
We have a large portfolio across the Diageo Group, so we’re bringing in more of our international drinks. On the other hand, we also have growing local pride. So, in the last 12 months alone, we are very proud of the innovations that we’ve brought onto the market. There’s Uganda Waragi Lemon & Ginger, which was successfully launched last year, and it’s creating a buzz, so much of a buzz, that we’re now in deep conversations on how we can take this to the world because it’s not just fantastic here, but the demand is high. It speaks to our fantastic site- we talked about being the Brewery of the Year but we were also the site of the year.
The other innovation from the local brands is Bell Lager Citrus. Bell Lager is our flagship beer, and we’ve had It since 1950. We recently came up with a fantastic innovation, Bell Citrus, which is a flavoured beer. Again, this is in respect to a new cohort of exploratory consumers who are interested in what we call the sweet and flavored category, which speaks to the likes of Uganda Waragi Coconut that we mentioned earlier.
The other trend that we’re seeing is moderation. So, more and more consumers are looking out for moderation. Earlier, we we talked about drinking better, and not necessarily more. So, we are also providing new products for those consumers. We for example have Tuskerlite, which is one of the fastest growing beers in Uganda. We’ve also brought in Whitecap. It is a new innovation in the last 12 months, with low alcohol- 3% alcohol content, which caters for moderation. For us, it’s about constantly scanning the environment, seeing what’s happening, pulling the trends, both from Uganda and the rest of the world. The Diageo Group, our mother company, does business in 180 countries, but we are also constantly anticipating consumer demands and innovating around them as well.
Andrew Kilonzo: As a a business and as an industry, we are taking risks by unlocking new categories. So here we pride ourselves in challenging ourselves to fall in love with our consumers every day. In that process, we also listen to them and find new product and we go into new areas. Emmy has mentioned lower alcohol content beers and the flavoured beers, but there are also ciders, and we also have the ready-to-serve such as Smirnoff Ice- basically, it is a spirit that is already mixed so that you can drink it like a beer.
However, you find that most of these innovations are ahead of their time when it comes to taxation policy. So you’ll find that the Smirnoff Ice you’re drinking next to your bed is taxed almost three times compared to normal beers- e.g Pilsener is taxed at an Excise Duty of 30% versus Smirnoff Ice at 80%. So you find that while with these innovations, we are taking the risk and going in new directions to give consumers more opportunity, more range and more options to celebrate their occasions, we are doing that at a cost because when we go that direction, the taxman is not connected/aligned to what our agenda is.
We continue to have conversations to try and see how can products in the same occasion be taxed in the same way which will yield more benefits across board as they are already being produced with local raw materials. There is a huge opportunity, because for instance, we now have a fully-fledged cider plant and a fully-fledged ready-to-serve plant. That means, at scale, we can make a cider in Uganda because Tusker Cider is made here and it is doing well, but from a profitability, and taxation perspective and from a price point, when you go to the marketplace, I’ll say 70% of the reason why it’s more expensive than other beer is tax, the rest is logistics. But the real opportunity is, that if we could get scale, then it also allows us to go now deeper and see, if we can we develop a cider concentrator because there are people willing to grow apples here, harvest the apples, get the juice and ferment it into a cider concentrate and supply it to us. At the moment we are importing. There’s enough market potential here, but because of the low scale at the moment, the potential investors in that part of the business might not be there. But even as we do that, we are also asking for a more enabling tax environment to allow for innovations within the same occasion, so we don’t have lopsided taxation on an indentical product.
Speaking about tax, investment and costs of production, UBL has been investing significantly over the last decade, and one of the biggest investments has been in a biomass plant as a replacement for Heavy Fuel Oil (HFO). In April 2024, UBL commissioned a state-of-the-art UGX 37 billion biomass plant with a target to reduce carbon emissions by 92% by 2030. That’s rather an ambitious target to be going after. How is it coming along?
Andrew Kilonzo: Yes, it is ambitious. We are an ambitious business. The plan to reduce carbon emissions by 92% is part of our Society 2030 targets. We want to be part of the community and positive contributors to the community. So the conversation around what we are doing with the farmers also speaks to that, but we are also citizens of the world, and we know currently the biggest issue is climate change. One of the biggest contributors to climate change has been identified as carbon dioxide. So carbon dioxide emission reductions for us as a business are critical. We are part of the global Diageo business, and the business made a conscious decision to be carbon-neutral by the year 2030. So, we are now putting our money where our mouth is. To be carbon neutral, you need to invest. So, by investing in biomass boiler plants, we are reducing our carbon emissions because we no longer burn fuel oil.
We are now using locally sourced biomass. Biomass is anything that you can burn to generate energy. What we do is we go to industries and ask them if they have waste that we can use in our boilers because we burn, get fire, boil water, and get the steam that we need, and that’s what we have invested behind, so the additional value in terms of carbon management is that in our manufacturing process, we are using biomass that would otherwise be waste, so there’s an additional benefit from that. The further benefit I’m getting is that it’s cheaper to go and get bagasse, sawdust, woodchips, and coffee husks, bring them here, and burn them to get steam to run our factory.
We are ahead of our target when it comes to carbon emissions reductions, and by 2030, we are confident that we are going to be there. The only small things we are now dealing with, for instance, include finding replacements for our backup generators, which still run on diesel, but we are trying to figure out how to solve that- maybe solar- we are going to look at that, but we are right on track. Then we are delighted that in Uganda, the electricity that we use is hydropower, which is green power and that contributes to our impact on the environment.
On this issue of illicit alcohol, what do you think can practically be done or are you already beginning to do for us to start to reverse the situation because there has to be a reversal. The direction in which this is going needs to be reversed.
Emmy Hashakimana: There are two parts to it. One is ensuring that we have the right regulation in place, but more important, is even the enforcement of this regulation. Earlier on, I talked about USD458 million (UGX1.7 trillion) in lost tax revenue that Uganda is losing every year. If you think about that amount of money and what it can do, even if we recover half of that- say USD 200 million- then it makes a lot of sense to invest in law enforcement because of the benefits. So even just from a logical business perspective, it makes sense for us to put a lot more investment in the enforcement of this by working with the partners. From our end, what we’re doing – there are education campaigns that we’re doing with different partners. We speak with the trade a lot – the customers that we deal with. We’ve also partnered with UNBS and some of the other regulatory bodies on enforcement, but it’s only a small chunk. There’s a lot more that can be done when you think about the huge opportunity that the country is missing out on taxes, but also, the issue of illicit alcohol is about ensuring that the health of the consumers is protected by making sure they are taking safe products.
Andrew Kilonzo: I think the Uganda Naitonal Bureau of Standards (UNBS) is doing a fantastic job- they have the processes and they come and audit us and do follow ups. So as a consumer, I’ll be looking for UNBS as my mark of safety. As mentioned earluer the formal industries that are registered and regulated are doing a good job. When you for example come to our lines you will see digital tax stamps machine registering every bottle that we produce, as we produce it. URA has visibility in real time of what we are doing. There’s no wiggle room.
The major question is, how do we get everybody on that? What needs to be added is enforcement. When you sit in some outlets, the local Kadukas, you’ll find our products are sitting right next to another product with no tax stamp, and I’m supposed to compete with them. The result or benefit of regulation is making the playing field level because we don’t have we don’t have a problem with competition- we have an ask for the level playing field. The instruments for levelling the field are there. We need to bring them to life through enforcement and then we will start harvesting part of the lost USD458 million.
Earlier you mentioned that the amount of money that you have put into digital tax stamps is about USD20 million over the years and this cost of stamps has gone to the tax stamps company and not the government. Right?
Andrew Kilonzo: Don’t get me started on a chapter that bothers me. But yes, that is an additional cost.
Even my bottling lines are only limited to running as fast as the DTS machine. Otherwise, it can run much faster. We are restricted by how fast their technology is. That’s another additional cost. The way we look at it as an industry, is that it’s an administration tool. It is a way to go to the market and identify the ones who are compliant and those who are not. However, the cost are so high- I could have invested that money (the USD20 million) in another three boilers. The other issue is that we have higher costs for digital stamps in Uganda- it is exactly the same team, the same company in Kenya and Tanzania, and it is exactly that same stamp that is being applied in Kenya, in Tanzania, by the same company, but in Uganda, it’s more expensive. For example, the tax stamps on spirits in Uganda it is 54% more expensive than the same tax stamp across the borders. Beer is about 30% more expensive. We are happy there’s been some progress, through the intervention of the URA Commissioner General, to bring the cost of the stamps down, but we are still there. We really need to reduce the cost of tax administration and spend the money on enforcement.
So then there is an opportunity; I know we have had very robust engagements, and there’s a question around if the production volume goes up, then the cost will come down. But without enforcement, it becomes a chicken-and-egg conversation. What comes first? Do we enforce to bring the volumes up or bring the costs down to bring more people into the net and then now spend money on enforcement? But we are almost there. We need to get this formula working; working for the legitimate players in the market.
Technology is upon us. AI is on the rise nowadays. You all already apply quite a bit of technology to the things that you’re doing. What do you see as being the role of technology in the business that you’re doing, especially from the perspective of how you manage sales and marketing?
Emmy Hashakimana: Tthe advances that we’re seeing in technology present a huge opportunity for us. I’ll give three examples of how we use that with the different stakeholders. First, with our customers, which is essentially the outlet owners- bars, supermarkets and kaduka owners. We have a platform called Diageo One. What Diageo One essentially does for them is- You load it onto your phone; any smartphone can do that. When you have it on your smartphone, you can order for goods from the distributor. We were used to the distribution model of opening up your shop and then waiting, hopefully, for the truck to come by that day or the next day. But now, with this in your palm, you can actually make an order, and the distributor will see it in real time, and they will be able to deliver directly to you. But also you can get to see the prices of the products, if they have been any price changes. You can also get to see the promotions that are being offered, and this is for the trade.
We also have a distributor management system for the distributors. It helps them with their operations and makes them a lot more efficient with things like stock management, making orders, and the ability to run reports and see their performance. It also has the ability actually to track their teams- they have different trucks going out with salespeople- they’re able to identify the sales on the different routes. It makes it very easy for them to manage and make decisions. And we also have visibility of that from UBL, so we’re able to run activities with them. So there’s that for the customers. We have that for the distributors.
Speaking of our sales team, we have a team that actually goes out to the market every day, and one of the things we’re doing with AI is on the system we call TRAX. So what the guys are able to do is get into a shop, take a picture of the shelf, and then it has image recognition, which will tell the brands that are on the shelf and create a report. Now, if I go back to the days that when I started selling, it was a lot of paperwork, you know, have these big manual books where we recorded the sales in the outlets- what you’ve seen in the outlets. But now, if you think about our distributor management system- you enter the information and it goes directly to the distrubutor’s management and ourselves. Even what is in the shelf, you take a picture and image recognition will tell us our assortment in that area. So, technology is providing opportunities for us, and there is still room for more. It’s really an exciting space, and we will be coming through with some solutions for the consumer and building up our direct-to-end user capabilities. So it’s a very exciting space for us.
UBL’s portfolio consists of beers and spirits. What are the respective ratios, and what would you say are the five leading brands—the brands that bring you the most money—in each category? How has that changed over the last five years? What component of the business is innovations in terms of revenue? Can you also paint an overview of the alcohol beverage sector from the Ugandan, East African, and the African perspective; where are the growth potential and opportunities in the industry?
Emmy Hashakimana: In terms of the portfolio split, it is probably 30/70 in favour of beer. But I think it’s important to mention that earlier, we talked about the impact of illicit alcohol, and one of the areas taking a heavy hit is our spirits category. That’s where we see a lot of squeeze within the sector otherwise, the regulated spirits category has a lot of potential; it could be bigger.
That said, we’re seeing a lot of growth at the premium end. There’s growth at the top, and there’s also growth at the bottom, and we’re really excited about the top end. Premium beer grew 9.8% last year and is one of our fastest-growing categories within the beer category, and the brands that sit within that is Guinness- we’ve also innovated around Guinness; we have Guinness Smooth in that sector, and then Tusker Lite and Tusker Malt as the flagship brands. We have innovations within that as well. So we’re seeing a lot of growth happening within that area. Mainstream beer is a bit squeezed, so there’s a lot of pressure. Rising prices are actually a big factor.
When we get into the spirits category, where Uganda Waragi, Bond 7 and V&A sit, there’s been a lot of growth. The opportunity in premium spirits is also massive. We’re seeing growth there but off a small base. Earlier on, Andrew spoke about achieving tax uniformity across the region. When you get to some of the border points, you will find that the premium spirits across some other markets are lower than that for Uganda. That then constrains us a lot. But the opportunity there is huge.
Speaking of innovation, moderation with a focus on alcoholic light drinks is just one of the areas we’re going after because it’s a growing trend, although it really cuts across all the brands. Over the last three years, we’ve had some brands that have come into the sweet and flavoured category- what we like to call that. The reason for that is because we have different cohorts getting into the consumer base, and they are asking for variety- we have the millennials and the Gen Zs but we are also seeing a lot of growing female participation. So we have brands like Tusker Cider, now manufactured in Uganda, and we have Smirnoff. We launched Smirnoff Guarana in a bottle recently. It used to be in a can, but now, you can also get it in a bottle and in the pineapple flavour too- all blended here in Uganda.
In spirits, I earlier talked about Uganda Waragi Lemon & Ginger, but in addition to that, we are bringing some of the international innovations like Gordon’s Pink, and I spoke about tequila (Don Julio) as well, which caters to different consumer asks.
We also innovate around brand format/packaging—especially around Uganda Waragi—to reach accessible price points with some of the Kafunda. We are also innovating around business models like draught beer. We now have Bell Lager in draught, which we have tested in the market, and you’ll find it in some of the areas before getting into scale. So it’s not just about the products but also the format.
Some of the global trends we’re seeing are spirits experiencing real big growth. We don’t do wine, but wine has slowed down a bit in Europe, although there is probably some growth in some of the emerging markets. But premium spirits are seein extremely healthy growth, and beer remains strong, especially in the top end of beer, and we’re seeing that across some of the different markets. Hence, the bringing in brands like WhiteCap which touch both moderation and premiumisation.