The liquor sector has had its fair share of challenges during the Covid-19 driven business disruptions and the road to recovery is not going to be easy either.
The pandemic induced restrictions further altered a playing field already skewed with layers of compliance requirements, heavy taxation and an ominous threat from various authorities looking for any slip-ups.
Even worse for the sector according to multiple sources is the ‘David-Goliath’ divide that classifies players into different categories at marketing levels but handles them as equals during compliance enforcements including taxation.
The big boys versus minnows war has deepened rifts where consumers span the economic spectrum with some able to afford a Sh23,000 for a litre of whisky in one sitting while others spend the same amount on tiple in a year.
“The standards require second tier companies to brand their products as portable spirits, a reference that naturally degrades their products as second-generation drinks when the ingredients and distillation process are similar if not sometimes better than the imported products. This classification alone makes it harder to compete in the market with the foreign brands,” an industry director told Smart Business requesting anonymity for fear of reprisal from the big boys.
The sector, which has one of the toughest entry requirements, is also said to have been made so by selfish interests to prevent more players from creating competition with smaller players who make the cut always on the run from authorities dangling the missing compliances threat.
Unfair competition
Alcoholic Beverages Association of Kenya (ABAK), which brings together 12 local producers in Kenya and one international importer admits that the industry has some ‘unfair competition’ witnessed in some areas.
Although they did not go into details, its members contend there is unfair targeting of smaller players always facing punitive measures from regulators and hanging onto the edge of the market despite remitting millions of shillings in taxes to the government.
Representation at the umbrella organisation alone with only 12 members out of the 451 players comprising 49 manufactures and 402 importers of beer spirits and wines, tells of the stratified market heavily tilted towards importation where rules are a bit lax than manufacturing where compliance makes dealers constantly walk a tight rope.
According to the ABAK chairman Gordon Mutugi , the industry which collectively contributes over Sh80 billion in taxes every year and which employs tens of thousands in the distribution and sales value chain, still faces a 50 percent competition from illicit beverages.
The enforcement has been anything but fair and the government continues to bleed in the upwards of Sh30 billion in taxes to trade in illicits every year.
Portable spirit labeling for example which was introduced after an intergovernmental taskforce was formed in 2015 to deal with the illicit brews, has permanently put a chokehold on smaller players who continue to struggle in a badly skewed playing field.
Excisable stamps
Factories continue to suffer inefficiencies and compromise tax administration that in many ways put them at odds with the administration. At the end of it, they are closed down and fined heavily.
Tax administration errors such as excisable stamps reconciliation issues and production inefficiencies place them on the wrong side of the law.
“A manufacturer with high factory inefficiencies for example may cause a significant spirit spillage and trigger suspicion when the procured spirit does not correspond with the declared tax. Likewise, the use of raw material to determine tax due is not always 100 percent accurate,”Mr Mutugi said.
To collect every bit of the excise tax, the Kenya revenue Authority installed a Sh17 billion Excisable Goods Management System (EGMS) from a Swiss multinational, SICPA Securities Solutions at every production line to monitor collections. The country’s tax regime in the sector significantly changed in 2015 when a move from the ad-valorem rates (based on the sales price) to the specific rates based on each litre produced drove the tax rates through the roof.
Higher taxes
The higher taxes have made border towns major smuggling zones for alcohol from cheaper neighbours with beer in Busia likely to be as cheaper or more expensive by Sh170 thanks to the huge taxation difference of beer and alcoholic beverages between the two neighbouring countries.
The Uganda Revenue Authority taxes anything between Sh18 to 51 (in Kenya shillings) per litre of beer depending on the content.
The two East African neighbours have a wide taxation gulf that even though Uganda is landlocked and imports its goods through Kenya from where it is transported around 1,000 kilometers to reach the border, it is still cheaper to buy goods from Uganda.
Small players can only pray that things change in future to secure the future of their ventures.
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