E-Malt.com News article: Kenya: East African Brewery chooses DHL to distribute its brands in the region

Global transportation and logistics company DHL has won a lucrative contract to handle the distribution of East African Brewery’s brands in the region, in a major restructuring drive that will see the beer maker fold up an entire department to outsource its supply services, Business Daily Africa reported on January, 21.

The region’s biggest brewer will hand over its warehousing and beer transportation operations to DHL, in a deal that people familiar with the ongoing discussions estimated to be valued at Sh2.28 billion - about six per cent of EABL’s turnover - which hit Sh38 billion last year.

Express Kenya - a Nairobi Stock Exchange listed firm - and SDV Transami, which have been EABL’s other major transporters, will be the biggest losers in the restructuring arrangement, observers believe.

An estimated 35 contractual employees in EABL’s logistics department will also lose their jobs, though DHL is expected to re-employ most of them.

“The decision to contract out to DHL for warehousing and the majority of transport supports a more efficient way of working with a major logistics supplier, allowing them to operate more cost effectively than we could,” said EABL in a statement.

The brewer has started deep cost cutting measures aimed at cushioning its profitability from a tough regulatory environment that has seen growth of beer consumption flatten out in Kenya, its most lucrative market that accounted for 83 per cent of its profits last year.

Steep beer price increases due to high taxation and surging raw material costs and the new alcohol control laws that have reduced drinking hours to only six during weekdays have curtailed EABL’s options of pushing more volumes to drive earnings.

Management consultants hired from Ernst and Young in London are said to be conducting a processes audit at the firm, and indication that further operational changes are likely to be implemented.

“We constantly review our supply chain operations to benchmark ourselves and also compare against other references,” said the company in response to queries on the ongoing audit, adding that “external parties are used to provide an objective view.”

Stephen England, the DHL area commercial manager, said the brewer had also contracted the German logistics firm to handle its international and domestic courier requirements.

Insiders at Kenya’s oldest brewer see the majority shareholder, Diageo as the hand behind ongoing changes- which are aimed at achieving operational efficiency similar to those of its other plants in Europe.

The London Stock Exchange listed firm currently controls 50.03 per cent of EABL.

Express Kenya, Transami and DHL have been the brewer’s major transporters, delivering its products to the major depots where it offloads to regional distributors.

The firm has six major distribution points identified as local (Nairobi area), Central, Western, Mountain, Coast and International.

In the new arrangement however, all warehousing and transport to major distribution points will be handled by DHL, cutting off the long supply chain for the brewer and putting the distributors directly under the global logistics firm control.

Beer distribution has been a lucrative trade for many local entrepreneurs, with business tycoon and former Kiambaa MP Njenga Karume’s saying in his memoirs he got a large portion of his wealth from his long standing distribution contract with EABL.

Managers at EABL, however, see it as an added cost and logistic headache that distracts the company from its core business, beer manufacturing.

“We believe that DHL offers the best overall solution assessed against our selection criteria of cost, quality, service, flexibility, and operational effectiveness, future competitiveness,” said the company,” adding that it was also reviewing its supply logistics in Uganda and Tanzania. EABL’s main competitor in Kenya, Keroche Breweries, said the move will improve operational efficiency of its rival.

Keroche’s chief executive, Tabitha Karanja said transport and distribution costs can take up to between six and 10 per cent of a brewer’s revenues, depending on its geographical reach.

Keroche has an internal transport manager who handles distribution, but said outsourcing “is the way to go.” “It’s not even more about the cost, it’s the headache of transporting the goods,” said Ms Karanja.

EABL’s purchase of a 51 per cent stake in Serengeti Breweries (SBL) at an estimated cost of $60.4 billion is expected to eat into its cash reserves, diminishing its ability to remain as one of NSE’s highest dividend payer.

After a five year period in which EABL has doubled its net revenues to Sh38 billion and increased profits from Sh4.7 billion in 2005 to the current Sh7.1 billion, EABL has been aggressively returning cash to its shareholders.

In the past five years, the brewer has paid out Sh21 billion in dividends making it one of the most sought after shares.

The stock was priced at Sh211 per share in trading on January, 20, compared to a 12 month high of Sh230.

Last year it paid Sh8.75 a share as dividend, pushing its total payout to Sh6.9 billion - accounting for 98.6 per cent of its net profits of Sh7.1 billion it posted in the year to March 2010.



21 January, 2011