A growing number of Kenyans are switching to the consumption of affordable keg beer. FILE PHOTO | NMG
|Business
Premium
Middle class ditch spirits, beer for keg on higher taxes
A growing number of Kenyans are switching to the consumption of the affordable keg beer, driven by the higher costs of bottled beer brands from increased taxation, the Treasury has revealed.
The revelation comes amidst falling revenue collections from beer and spirits sales, with the Kenya Revenue Authority (KRA) noting the delivery of spirits by volumes plunged by 20.7 percent in the quarter ended September 2023.
The exchequer has quantified the rise in keg consumption by tracking the value of excise duty forgone from the exemption granted to beer or wine made from sorghum, cassava and millet.
The value of tax forgone from the sale of keg beer hit Sh7.2 billion in 2022 from Sh6.2 billion according to data from the Treasury, pointing to the increased consumption of keg or draught beer.
“The upward trend in tax expenditure (forgone tax on domestic excise tax) is attributable to an increase in consumption of keg beer. The increase could be attributed to a rise in excise duty charged on beer in the year 2022 which led to an increase in beer prices, thereby shifting consumption from bottled beer to keg beer,” the Treasury stated.
Alcoholic beverages were spared from new taxes this year. But excise duty on bottled beer not exceeding an alcoholic strength of 6.0 percent rose to Sh134 per litre in 2022 from Sh121.85 in 2021.
Excise duty on wines shot up from Sh208 per litre in 2021 to Sh229 per litre last year while duty on spirits exceeding 6.0 percent in alcohol strength rose from Sh278.70 to Sh335.30 per litre in 2022.
Tax forgone from the waiver of excise duty on keg had collapsed to just Sh4.1 billion in 2020 when the government ordered the closure of bars and restaurants as a measure to mitigate the spread of Covid-19.
Despite the growing switch to keg, manufacturers such as East African Breweries Limited (EABL), which is the maker of the Senator keg brand, have registered shaky sales volumes even as it warns some consumers may have turned to illicit and counterfeit drinks as alternatives.
In its financial year ended June 2023, Senator keg sales volumes softened by 3.0 percent.
According to Kenya Breweries Limited (KBL), lower spirits sales volumes signal a downward trend in the sale of legal mainstream drinks.
“A recent industry report from Euro Monitor indicates that nearly two-thirds of alcohol being consumed in Kenya is illicit, meaning that far more people are resorting to the bad stuff that not only endangers their life but also denies the exchequer due revenues. Spirits have faced double-digit annual excise tax increases since 2015, deepening an unaffordability problem that has been worsened by runaway input costs such as ethanol which went up 61 percent during our last financial year,” said KBL managing director Mark Ocitti.
Mr Ocitti reckons that the industry faces another regulatory dilemma in the requirement to make excise duty payments within 24 hours impacting alcoholic beverage manufacturers’ cash flows.
KBL notes that current taxation rates are a tipping point for the industry having observed that the average monthly consumer spending on alcoholic beverages reduced by 5.0 percent in the periods before and after Covid-19.
During the 12-month period to June 2023, EABL reported that it raised the prices of its products by an average of 8.5 percent, leading to slower growth of sales volumes with the higher costs of beverages being aimed at absorbing higher input costs and higher taxes.
Depressed sales
In a July interview with the Business Daily, EABL managing director Jane Karuku stated depressed sales volumes which also cover the low end of its brand portfolio have been a factor in higher product costs.
“It’s the same behaviour as any other customer would have when prices increase. The low-end consumer gets more pressure as their pie, which is already small, has to be cut into many other pieces, but these pieces are getting bigger,” she said.
The government had until now viewed alcoholic beverages as products whose price is inelastic, implying that their consumption would not be hurt by higher prices.
The notion of the price inelasticity of alcohol had made the industry an easy target for new taxation.
This year, however, the government spared alcoholic beverages and cigarettes from excise duty increases for the first time in five years.
