Financial Times - Lion Brewery profits fall as govt. frowns on consumption

Market analysts said that the 'double tariff hike' in excise duty in November 2005 has pushed up retail prices, resulting in a drop in sales volumes of the price elastic product - with volumes adversely affected, the company has been unable to fully passon cost escalations to customers, resulting in reduced gross profit margins.

Lion Brewery's 2007 first quarter profits dipped by 80 percent to Rs.26 million due to the 'double tariff hike' in excise duty in November 2005, according to the company’s latest review.

Revenue fell three percent to Rs.949 million, while cost of sales increased three percent to Rs.650 million, resulting in 2007 first quarter gross profit declining 13 percent to Rs.298 million, with gross profit margins declining to 31 percent from 35 percent in the corresponding period in 2006.

“Increased petroleum prices and additional marketing communication costs to combat lower volumes have contributed towards increasing distribution costs in 2006,” brokers C.T. Smith Stockbrokers said in a separate report.

The brokers said that despite regulatory constraints limiting growth prospects of the industry, leading regional player Asia Pacific Breweries entered the Sri Lankan market with the acquisition of a controlling 60 percent stake in Lion’s rival United Brewery Lanka Limited (UBL) in September 2005.

UBL is a smaller competitor (market share estimated at 10 percent), producing and marketing local beer brands such as ‘Kings Lager’, ‘Kings Pilsner’, ‘Kings Stout’ and ‘Bison Xxtra’. UBL, which was renamed as Asia Pacific Brewery (Lanka) Limited and has recently re-launched its local brands. APB intends to infuse up to US$5 million into its Sri Lankan operations, with plans to introduce its own ‘Tiger’ and franchised ‘Heineken’ brands in the medium term.

Finance costs increased 52 percent to Rs13 million but the company’s gearing position however remains relatively healthy, with Lion's net debt to equity ratio (including preference share capital) increasing to only 12 percent as at end of the first quarter in 2007 compared to five percent as at end of the first quarter in 2006.

The company in its review has said that the hard alcohol sales volumes have grown during this period since they continue to enjoy a preferential duty structure in comparison to soft alcohol. “The result is that the total consumption of alcohol has increased significantly during 2006 although the government - like all governments in the past - professes a need to reduce alcoholism in the country,” it has said, adding that the growth in illicit alcohol sales - recently estimated by the World Health Organisation (WHO) to be 92 percent of total alcohol consumption or 627 million litres per annum - continues to outpace the sales of legal alcohols adding to a further increase in alcohol consumption.

“Thus the irony is that a country which seeks to curb the spread of alcohol has through its policies, in fact, encouraged its consumption at an alarming pace. An example of such naive policy-making is the recently enacted bill prohibiting the advertising of alcoholic beverages,” it has further said.

“Whilst we accept the need to control the promotion of alcohol in markets where the consumption of legal liquor is widespread, in the local context, where illicit alcohol is predominant, we believe that the enforcement of the bill will negate the intent of the lawmakers,” it said, adding that the existing industry conditions have led to a substantial decline in the profitability of the company.

“At present representations are being made to the relevant authorities and it is hoped that a more positive business environment pertaining to the beer industry will prevail,” the company said.