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This article first appeared in The Edge Financial Daily, on March 31, 2016.

 

Hans-Essaadi_FD_31March16_theedgemarketsKUALA LUMPUR: Besides the cigarette makers, the breweries are probably another group that is choked by excise duty hikes, which are likely to eat into their profit margins at a time when consumers are tightening their belts.

Worse, they are losing market share to illicit products.

“It makes no sense to commercialise this increase [in excise duty], to go big on (price) hikes. It is probably not the right thing to do [in the current economic environment],” said Guinness Anchor Bhd (GAB) managing director Hans Essaadi.

“Your demand will go down [if prices are increased significantly]. Yes, you may get more out of it (price increase), but less volume as a result of that,” he added.

Weighed down by the recent hike in excise duties and cautious consumer spending, Essaadi may be facing a challenging task to sustain the brewery’s profit margin.

“In an ideal world, a consumer price increase does not change demand, and if that is the case, then there is no effect [on profits],” he commented.

Essaadi said GAB is trying to mitigate price hikes and the management team will be deliberating on whether to further raise prices of its products after July 1. “With consumer sentiment being at a 10-year low, we have to be careful moving forward,” he said.

In view of the tax hike, GAB has announced a 2% to 5% increase in the prices of its key brands.

The government mandated a new duty structure effective this month that will be now based on alcohol content of alcoholic beverages.

To recap, tax is now levied on the percentage of alcohol in the beverage (RM175 per litre of 100% alcohol by volume) as opposed to volume previously (RM7.40 per litre plus a 15% ad valorem tax).

UOB KayHian Research said the new tax structure would result in an 8% to 10% hike for mainstream beers with 5% alcohol content, which encompasses majority of industry sales.

According to Essaadi, since the implementation of the new excise duty structure, the market has seen a relatively moderate 3% increase in prices of mainstream beers.

On the other hand, GAB finance director Atul Chhaparwal said following a normalisation of consumer sentiment after the goods and services tax implementation, GAB’s top line has grown due to increasing cost efficiency.

“When you can’t increase prices, you focus on driving cost efficiency even harder and that’s how we have been delivering healthy profits,” he added.

For the quarter ended Dec 31, 2015, GAB’s net profit grew 19% to RM90.84 million from RM76.12 million, while revenue was almost flat at RM524.55 million against RM520.77 million in the previous corresponding quarter.

The company attributed the higher net profit to improved cost efficiency, phasing of certain brand advertisement and promotion investments which will take place in the coming months, as well as higher sales.

GAB has changed its financial year end to Dec 31, 2016.

It will be interesting to see if GAB can sustain the impressive earnings growth for the financial year ending Dec 31, 2016.

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