Keeping the Faith
EABSC Gazes at the Sunshine Across from the Discomfort of the Eye of the Storm
Daryl Wilson, CEO of East African Bottling Share Company (EABSC), arrived in Ethiopia just last year. Originally from south Africa, he was Managing Director of Nairobi Bottlers of Kenya for nine years before coming to Ethiopia. With 27 years in the business, Daryl Wilson has seen the troughs and the picks of the industry even before the turn of the century. He is already overseeing construction of two epic factories in Hawassa and Sebeta with an outlay of a staggering USD300 million. The two factories will triple the volume of coke products in Ethiopia, besides launching new products. He says Ethiopia is the fastest growing beverage consumer market in Africa. Nonetheless, the humorous CEO is not all that excited. The company already lost over 15Pct of its sales revenue due to the new Ethiopian excise tax regime and COVID-19. EBR’s Ashenafi Endale spoke to the CEO on various issues.
EBR: How do you evaluate the impact of COVID-19 so far, in terms of production and sales?
Daryl Wilson: COVID-19 is disrupting everything globally and Ethiopia is not an exception. The number of cases is exponentially increasing. The economic impacts will take long time to heal. But from business perspective, our company took the initiative very early. We are protecting our employees as best as we can. We are also supporting the public at large. We supply sanitizers we produce, masks and other equipment for our staff and community continuously especially around where our factories operate – Bahir Dar, Dire Dawa and Addis Ababa.
As a responsible manufacturing company, we have been doing what we can for Ethiopia’s population. The impact of COVID-19 is severe and most of the 110 million people are suffering. We are supplying consumption items like flour, pasta, our products and household support for free, especially for the community significantly affected by COVID-19.
Consumer behavior is also shifting from eating and drinking since most of the restaurants, hotels and bars are closed. More than 50Pct of our sales volume goes through eating and drinking outlets. So, we have been forced to find a way to stay in touch with our customers at home. This is really a very tough time and environment. But we are also highly optimistic. The last couple of weeks were good for us, although the hiking number of COVID-19 cases remain a worry.
From the economic perspective, the country is going to take long to revive from the impacts of COVID-19. Even if COVID-19 was to disappear tomorrow, its economic impact would be around for long. But we are striving to make the company adaptive, flexible, and agile. We are trying to do what it takes to find the consumers and provide them with what they want for the right price. We are trying to keep on working, safely.
A lot of people stay home due to COVID-19. Individual revenues also might be affected. Is beverage consumption increasing or declining under COVID-19? How is the consumer landscape changing?
Consumption has definitely dropped. People are not generating more income and outlets like cafes, restaurants and bars are also closed. Just before COVID-19 came, the government introduced the new excise tax. The introduction of the new tax regime increased excise tax from 14Pct of revenue to 25Pct of revenue. It significantly increased the cost of our products. We could not absorb the price increments.
We are the highest tax payer in all sub-Saharan African countries we operate in. Inflation in Ethiopia is way above 25pct and COVID-19 came on top of that. The demand is dropping and we are not at the right level we want yet. We would have been way better, had it not been for the excise tax and COVID-19. The Excise tax reform put us in a perfect storm. Our profit has been plummeting drastically lately, especially after the introduction of the new excise tax in Ethiopia.
How badly has the excise tax directive affected your revenue?
Very badly. The projection we submitted to the Ministry of Finance estimated revenue drops of 15Pct due to the new excise tax. But now it has dropped by way more than that. For example, the amended excise tax as a percentage of revenue makes Ethiopia the market with the highest excise tax across the countries where Coca-Cola Beverages Africa operates (13 African markets in total). For example, it is eight percent in Kenya and 11Pct in Uganda. Ethiopia’s Excise tax is now 25%, up from 14% before the tax revision.
Prior to the new excise tax framework that was adopted in February this year, the excise tax in Ethiopia was based on 30Pct of cost of production (which translated to 14Pct of revenue). If the company does take a price increase commensurate with an attempt to mitigate the increase in tax, we anticipate a volume loss of at least 15Pct in the first year.
We do not welcome the risk of a 15Pct volume loss since the impact on our business would force us to restructure the organization with possible direct permanent job losses and additional indirect job losses in our value chain. While the excise tax reduction on sugar does cushion the impact slightly, the net impact is still of great concern.
The price of soft drinks almost doubled in Ethiopia over the last decade. Is it because of the inflation in Ethiopia or just part of an international trend?
The price of raw materials and a lot of commodities in the international market showed a dramatic increase. Coupled with foreign currency shortage, these trends resulted in a spike in local price. The cost of foreign currency in Ethiopia and especially the depreciation over the last six months has contributed a lot.
So, we were supposed to find a way to absorb as much of the price spiking effects of inflation, devaluation and tax raises as we could just not to transfer the price increase to consumers. We have been taking in price increases over the years but we do not usually choose to adjust price due to inflation. But so far, our price adjustment is insignificant compared to the price we have absorbed. We believe the beverage industry has a potential. There is great prospect and opportunity and we are very happy to have this opportunity. The people and the market are both growing, while the economy has big future and reforms are coming through. We are doing great expansion investments.
How big is East African Bottling Share Company (EABSC) in terms of revenues, profit and employment opportunities?
We have been here for 60 years. Currently, we employ 2,040 directly and around 50,000 people indirectly. We have factories in Bahir Dar, Dire Dawa, Sebeta and Addis Ababa. New factories are underway in Sebeta and Hawassa. There is another sister company in Ambo, Ambo mineral water factory.
Our revenue has been a success. That is why we have been in Ethiopia for 60 years and are currently investing USD300 million in Ethiopia. Since 2010, Coca Cola Beverages Africa (CCBA) has invested an estimated USD150 million in Ethiopia. The business contributes an estimated USD217 million to the economy annually in salaries, taxes, manufacturing, distribution and local shareholder profits. Ethiopia is a great country with growing market; so, we will keep investing and expanding. Our market share in Ethiopia is also high, compared to others like Pepsi. We are maintaining that by introducing new products like the sugar free products we recently launched.
Talking of sugar free products, did you introduce them because of the shortage of sugar supply in the country?
No. The amount of sugar we are getting from the sugar corporation is small and declining. Importing sugar is also very expensive. But that is not the reason for producing sugar free brands. A lot of Ethiopians who frequently use our soft drinks want sugar free products. It is due to the demand from consumers.
The beer industries in Ethiopia are linked to barley farmers, in a direct value chain. Currently, the Ethiopian government is privatizing sugar factories. So do you have plans to buy one of the factories and get yourself directly involved in the supply chain?
We would be really happy to invest in one of them and we are waiting for the government to come back to us. We know sugar is a critical ingredient and we want to add value to our products by engaging in the backward value chain. Good quality local sugar is what we want.
Did you propose to the government that your company is willing to participate in the acquisition?
Yes. We expressed our interest to the government and we are waiting until the government goes through the due diligence and finalizes the next steps of the privatization process. We will get the government’s feedback at the end of this month.
Has EABSC merged with Ambo mineral water?
When we formed Coca Cola Beverages Africa, three companies came together. The first one was the Coca Cola Company, which has big interest. The second is South African Beverages (SAB), which engages in non-alcoholic beverages. The third is Gutsche’s Family investment (GFI). SAB owned ambo mineral water. So when the parents merged, the companies became members of Coca Cola Beverages Africa (CCBA), the current company. So, Ambo Mineral Water is a sister company of EABSC. We are working on designing a way to synchronize the sister factories and organizations of EABSC and Ambo Mineral Water in the future. CCBA owns and operates EABSC and Ambo Mineral Water in Ethiopia.
There were individual shareholders in EABSC. Who are the current shareholders?
CCBA is the major shareholder in EABSC. The chairman has small shares but EABSC is fully owned by CCBA. CCBA group was formed three and half years ago. We now have 40pct market share in the African beverage market. We have presence in 13 countries. We employ 16,000 people. We lead the Ethiopian market with an overall market share of over 60pct, although the market share varies from region to region.
What are your management and marketing philosophies?
We work hard to reach our customers through below the line and above the line strategies. We advertise products to the market we serve, which is growing faster in Ethiopia. Our strategies capitalize on the ways that help us get closer to our consumer whether it is for the sugar free, sugar containing or Ambo products. We connect to customers across the ages and other differences.
How do you see the market dynamism in Ethiopia?
It is an immature market in terms of availability. There is market competition; but there are not enough brands and products in the market. There are only 15 types of products in Ethiopia’s market, lower than other markets like Kenya. It is a virgin market with a dynamic and growing demand. While consumption of soft drinks is comparatively low, demand is growing as middle class broadens and spending rises. We invest a lot and launch more products to tap into the market.
Our marketing strategy depends on the regions and what the consumer needs. We usually use below the line marketing strategies to connect more with the consumer. Our marketing strategies vary from Dire Dawa to Bahir Dar. We strive to satisfy the needs. We spend in excess of USD10 million annually for marketing and advertising.
We hear branch and marketing managers of the company are paid high salary and benefits. Is it related to performance or just the organizational scale?
First, we always invest a lot of money in educating our staff. We pay them good money and make sure they are happy. We maintain the best trained professionals in order to stay competitive in the market and satisfy the customer. Incentivizing employees is the major mechanism towards that end. Investing in people is the secret behind our success.
People are always behind the success of any organization. Despite doing the right thing, many companies fail because they are unable to find the right people. The success of our organization is based on our ability to make our employees stay motivated. Even under the current situation, when many companies are facing challenges, we are making sure our employees are getting better salary and benefit packages. Employees must have benefit packages that match their efforts.
The beer and bottled water markets have been growing in recent years. Especially the beer companies work aggressively on marketing strategies that include providing furnished bars and restaurants and refrigerators for bars and restaurant owners to sell their products. Do you think the consumer is fundamentally shifting away from coke and soft drinks?
We also provide cafés, bars and restaurants with tables, refrigerators and many other equipment, including providing fully furnished premises with our brands. So, we are doing exactly what those companies are doing. They are growing; we are also growing. That is why we are investing USD300 million at a time.
In fact, the number of consumers slightly declined in relation with the price increment that followed the excise tax increase. But a new kind of consumer segment is also emerging. That is why we introduced a number of new products including the sugar free products.
Defective products are often found in the market. Are there substantiated defective products at the company or are those claims part of the market competition from the sector? How do you evaluate the competition?
We welcome competition because competition makes us vigilant to technological changes such as digital machinery. However, avoiding defective products in the market is impossible.
But there is also frequent occurrence of outdated Coca Cola products, especially in the regional towns. How do you inspect expiry dates?
Expiry date is very important for us and we manage it very effectively. We are better compared to many other countries. Consumers and sellers keep expired products at home and we collect it from the market.
EABSC is also engaged in the bottled water business through the Dasani bottled water. But the number of bottled water companies in the country tripled in a short time and the market is already crowded. Do you think Dasani is a viable investment?
We want to avail what the consumer wants and we will keep expanding the bottled water business. The bottled water market is highly competitive and we want to provide high quality water at a good price. We will invest more in the expansion of our bottled water business to give the consumer more options. We will definitely have new products in the coming couple of months in this sector.
Are there currently other new products and brands in the pipeline?
Definitely. Once the Sebeta plant is finalized, it will give us more production lines and more options of products for the consumer. New brands and brand extensions will be launched from the new Sebeta factory.
At what stage are the expansion projects? Has COVID-19 affected expansion plans?
Sebeta will be operational at the start of next year. It will be operational by September. It is 60pct complete. Currently, we are trying to meet the Ethiopian demand with existing factories. It might be delayed by two months. But we have not changed our expansion plans for Ethiopia, even under COVID-19.
How much do the Sebeta and Hawassa new plants cost?
Both plants cost USD300 million. Our factory in Hawasa is big. But Sebeta will also have six production lines apart from the plastic recycling factory. Sebeta will be the biggest in the group. When the two are finalized, our total production in Ethiopia will be tripled.
How do you evaluate the support of the Ethiopian government in terms of incentivizing the expansion projects?
We are undertaking big expansion projects, including the new factories worth USD300 million. This is a big investment and that is why we are concerned about the excise tax. It significantly affects us and our new investments. But we are also hopeful because we are getting good support from regional governments where we have new operations like in Bahir Dar, Sebeta and Hawassa.
We are so happy with their support and we are making sure the community gets what they want. The community is also happy with the schools, clean water and other support we provide. We are the biggest company in the sector and I am sure there are many opportunities we can explore with the Ethiopian government. We are investing heavily despite the market being uncertain at times. But we have governmental support in various aspects.
How do you evaluate the investment climate in Ethiopia?
We are a very big and responsible company and we have many options to invest in any other country we want. Ethiopia is the best place to invest. We believe in the country, in the future, in the opportunities and in the reforms. We are currently investing USD300 million; we would not make such a decision lightly. It is a big country, a lot of opportunities; the middle class is increasing, with great reforms coming through. So we are very happy to continue investing in Ethiopia.
In fact, the Coca-Cola Company and CCBA have clearly demonstrated our commitment to investment in Ethiopia as well as our confidence in the growth of the Ethiopian economy. However, the quantum of our investment commitments was decided based on our projected returns under very different circumstances prior to the new Excise tax that stands at 25Pct of revenue.
Policy certainty as well as tax regimes are critical for businesses to calculate investment opportunities with the degree of accuracy required by shareholders in terms of reasonable returns on investments. Government assurance, in this regard, would be highly valued.
What are the challenges you face frequently in Ethiopia?
The single biggest challenge is the shortage of foreign currency. It is difficult to operate without importing some ingredients and equipment. Accessing foreign currency became the most difficult thing in Ethiopia, especially since the last six years. Foreign currency shortage has become worse, especially under COVID-19.
The second problem is the Excise tax regime in Ethiopia. We are very keen to support the reform and very willing to pay tax as a responsible company. The issue of tax is sensitive in Ethiopia because this is a highly taxed country. We are also the most taxed company in the 13 African countries where CCBA operates.
How about power outage? I know that your company had a plan to become power-self-sufficient. Did you achieve that?
Power remains a big challenge throughout the country. We usually rely on generators. It is an expensive way of producing but we have no option. But currently, we are working on solar energy for our factories in Sebeta and Hawassa. We are also looking into replenishing water usage. We are very sensitive to water efficiency. We recycle and replace the water we use for every bottle.
What is your back up plan to compensate the market fluctuations due to COVID-19?
Under COVID-19, the biggest challenge is getting to the consumer. The consumption trend is shifting because a lot of people are staying at home. So we have to find a way to reach the consumer at home. We have installed a call center to directly contact the consumer. This would help us find the consumer at home. We are also making sure that our products are available at any place and time across the country.
We make sure that we are supplying the right product for the right price. Staying at home, people are not eating and drinking at cafés and restaurants; but this will change. The economy is also opening up from the first COVID-19 hit, but I believe the economy will revive soon. But we will continue our effort to find the consumer at home.
Do you have plans to partner with franchises in the fast food business?
We have plans along that line, if we can get good partnership and good agreement.
The Ethiopian government is planning to launch stock market in three years time.
Do you think your company will be listed?
Should the need arise, we will take any opportunity. We will consider any option in this regard. We are an African based global company. We will definitely be listed.
How do find Ethiopia’s policy in profit repatriation?
It is challenging. We are unable to take out dividends for a number of years because of the foreign currency shortage in Ethiopia. We are reinvesting it because we are not able to send out any dividend to shareholders. We hope the situation will change as the economic reforms succeed and tackle the foreign currency problem. Once more foreign currency is available, the policy will also change.
What are your recommendations for big companies in Ethiopia, particularly in terms of Corporate Social Responsibility (CSR)? Do you think the community is benefiting?
Definitely. We are providing clean water, schools, job opportunities and many more. We provide as much as we can and the community recognize that. That is why communities most welcome us everywhere our factories are planted. We allocate millions for the communities, every year.
We also donate for the Red Cross organization. We are also supplying food and drink donations for communities where our factories are operating; these places are: Dire Dawa, Bahir Dar and Addis Ababa. We gave away more than ETB11 million, particularly over the last two months since the onset of COVID-19 in Ethiopia.
A lot of companies discharge CSR only when it is convenient for them. Why don’t you allocate a certain fixed percentage of your revenue or profit to continuously and constantly reach beneficiaries through an institution?
We do not reap the benefits and go away but we are giving back to the community, as a responsible company. We are supporting the community and giving special attention to key initiatives throughout our operation. For instance, we understand the importance of youth education.
We have built two state-of-the-art school blocks at Shimbit Elementary School in Bahir Dar, benefitting 1,600 students at a total cost of USD220, 000. We have almost completed constructing a similar school at our new factory in Sebeta at a total cost of USD236,000 following consultations with the Sebeta community to understand the community’s needs. We have invested USD31, 000 in a bursary programme for outstanding university students from low income families and run a Graduate in Training (GIT) programme for the past 11 years, benefitting 275 employees to date.
We are undertaking various projects that address the community’s problems. For instance, we just set up new factories that recycle plastics. Plastic is a great package but it also degrades the environment. We established the plastic recycling company PETCO (PET Recycling Community Organization) as an NGO subsidiary. We have set up around 70 plastic collecting centers across Ethiopia, to make it easier particularly for women plastic collectors.
The plastic recycling company was established four months ago. The Poly Ethylene Terephthalate (PET) factory took USD160, 000 injection from the Coca Cola Company. We will subsidize the collection and recycling operations. In Ethiopia, we have facilitated the collection of more than 6,000 tons of PET from the environment. Moreover, we want to support the waste management objectives of local governments by making recycling more accessible; and as CCBA, we are confident that we will reach the 100Pct PET collection and recycling target well ahead of the 2030 target. EBR
9th Year • July 1 – July 15 2020 • No. 88
