Ethiopia: BGI Ethiopia’s legal wrangling pile up
BGI Ethiopia’s legal wrangling pile up as the brewer adds a lawsuit from some of its largest distributors to the property sale saga with Purpose Black. Fourteen leading BGI distributors, accounting for nearly half of its network, accuse the company of a breach of contract by awarding their distribution market segments to new players, The Reporter Ethiopia said on March 30.
The distributors filed a legal suit in December 2023, seeking an injunction order on BGI’s new distribution contracts. The injunction has been granted.
“We have a two-year contract with BGI to distribute its products in market segments assigned to us,” said Sintayehu Gebresellassie, president of the distributors’ association. “Legally, we have a year and a half before BGI gets the window to decide whether to onboard new distributors or continue with us. But BGI has overridden the contract and started giving away our market to new distributors.”
The Reporter has confirmed BGI and the original distributors entered into a contract in July 2023. Members of the association have presented transaction receipts that indicate the new distributors contracted by BGI have already begun work in market segments assigned to their predecessors.
Attorneys representing BGI Ethiopia filed a request for a reversal of the injunction with the Federal First Instance Court last month. Judges have rejected the plea.
“BGI should not grant market segments to new distributors. If this has already commenced, it shall be halted until the court reviews the case and provides a final verdict,” reads a court statement.
A statement from the plaintiff notes the involvement of new distributors poses significant losses for the original contractors, who have invested heavily into their distribution network.
“Existing distributors have invested six billion birr collectively, in specialized trucks to distribute BGI products, warehouses, and other facilities and equipment,” said Sintayehu. “If BGI wants to replace us, the company can do it legally through prior notice, then we could gradually recover our properties.”
He argues distributors have invested in trucks and other aspects of the business since signing the contract last July and accuses BGI of “snatching” their markets away.
The executives at BGI Ethiopia, led by CEO Herve Milhade, have a different perspective on the issues. They argue the company has been forced to introduce a new distribution model to fix “inefficiencies” in distribution.
“There are huge gaps and inefficiencies in the existing distribution model. If we want to keep our market share from fierce competition, we must double the number of our distributor agents,” said a manager at BGI who spoke to The Reporter on condition of anonymity.
BGI had less than 40 distributors at the time the contract was signed last year.
“These distributors want to hold onto the entire market exclusively. For example, one wants to handle more than one region but the distributors do not have the capacity to reach the number of outlets that we want,” said the manager.
He disclosed the brewer is hiring new distributors on the basis of a study recently conducted by a company.
“We need to onboard many more new distributors to cover the market efficiently,” said the manager. “The contract gives BGI the power to terminate the deal with existing distributors if they are found lacking in market coverage or if they are found selling the products of a competitor.”
In email response to The Reporter, Behailu Ayele, communication director of BGI, stated “BGI has full right to amend the contract whenever it sees fit.”
A document obtained by The Reporter reveals BGI execs have on-boarded 135 new distributors to the network. The document also accuses existing distributors of selling competitors’ products.
“BGI Ethiopia is in the midst of a transformative renovation of our operational and distribution model. We are excited to announce the rollout of 135 new sales zones, designed to enhance the reach and efficacy of our distribution efforts. Unfortunately, amidst these sweeping changes, a handful of distributors have chosen to resist BGI-Ethiopia’s holistic change and decided to depart from our company and join the competitors. While their decision to defect saddens us, BGI-Ethiopia remains firm in its commitment to modernize its distribution network,” reads an internal BGI memo.
The army of new distributors brings BGI’s network on par with that of Heinken, which reportedly contracts 115 distributors.
The brewery distribution business has its own set of standards that apply across breweries. Market segments are assigned to a distributor based on geography, outlet availability, and consumer landscape. The size of a distributor’s fleet, road and security situations, and the supply of crates and barrels are also factors.
Outlets include bars, restaurants and other retailers that offer and supply beer to consumers. One ‘sales zone’ is composed of 500 outlets. A large distributor can handle up to three sale zones, or 1,500 outlets, according to industry standards.
“The existing distributors want to manage up to 6,000 outlets through a single distributor. That is impossible. That is why we are trying to onboard new distributors. One distributor cannot handle more than eight woredas. But the distributors accusing BGI want to manage up to sixteen. That is impossible. They do not have the trucks or the efficiency,” said the manager.
The next court hearing for the case between BGI and its distributors is scheduled for April 3, 2024, but things on the ground are changing quickly.
Sources disclosed to The Reporter that some distributors are refusing to carry BGI products, and BGI execx claim the distributors are rebranding and shifting to other products.
Outside the courts, there are layers of complex issues exacerbating the row between BGI and its old distributors. These factors include distributors’ demands for BGI to review its transport tariff margin. The brewer, however, also claims it is owed hundreds of millions of birr in receivables from distributors who took its products on credit.
The existing distributors also act as transporters because they distribute the beer products with their own trucks. After they transport the products, BGI pays the distributors for the transport costs.
“We have been asking BGI to review the existing transport tariff, which has not changed for years. Even the government revised transport costs in the past years, due to the price surge in fuel. We requested several times, but BGI refused. We have been transporting BGI products while incurring losses,” said Sintayehu. “We were expecting the tariff revision, instead, BGI management started replacing us with new distributors.”
However, the manager at BGI refutes this.
“They would not be in the distribution business if it were not profitable for them. Second, we’ve been studying the market before revising the tariff,” he said.
The manager claims BGI has been compensating for the low tariffs by offering ‘benefit packages’ to distributors.
“We have been giving them products for free,” he told The Reporter.
He says the company recently cut short the practice of providing products to distributors on credit, with payment to be settled after sale. He claims BGI gave distributors a four-month window to settle any receivables they may have accrued – some 900 million birr’s worth.
“Some of them paid. There’s still 400 million birr outstanding,” he said.
Sintayehu, however, refutes this but admits distributors do have accounts to settle.
“Distributors only take products after considering capacity and paying in cash. This is because BGI has been pushing distributors past their capacity. The company forced us to take the products on credit. We accepted because we thought it was working on market maximization,” he told The Reporter.
Sintayehu says distributors used to consider the relationship with BGI management “like family.”
“The new management is intentionally trying to harm distributors and agents,” he said.
The dispute with its distribution network comes as BGI Ethiopia navigates another legal battle with Purpose Black over the sale of its 30,000 square meter property in the heart of Addis Ababa. Purpose Black successfully sought a court injunction on 1.5 billion birr in BGI accounts following a fallout over the mega-deal.
Judges have recently lowered the figure to one billion birr.
01 April, 2024
