BAT Zambia Smokes itself to LBT in 2017
British American Tobacco, Retail

When the SENS Announcement of 27th February 2018 came out from British America Tobacco Zambia that they were expecting a loss before tax (LBT from the income statement) we were in awe of the magnitude K14.9 million that would be reflected when the financials would be officially published.

As a recap, in their 2016 annual report, Godfrey Machanzi (Managing Director) had stated that Jan 2016 saw a staggering 122% increase in the minimum excise charged to BAT brands. This then influenced the management’s belief system that the way to go was to make a local investment that would see the tobacco company manufacture its products locally with assurance that this would mitigate the effects of the high excise tax.

In the same annual report, Micheal Mundashi (BAT’s Board Chair) pointed out that the threat of illicit product on the market deeply threatened their market share. Fast forward to present day, it appears endogenous and exogenous forces plagued the company in 2017. We do not have the final year results yet, however according to their company secretary Valentine Kabonga (through SENS Announcement), the loss before tax that is yet to be reported was mainly driven by volume loss across the portfolio of products. Excessive excise duties continued to weigh heavily on the firm. Increases in operating costs and bad bets on hedging of local currency against major convertible currencies hurt the firm.

From a strategy point, Valentine signals that the firm attempted a low cost approach in order to protect and possibly grow market share. This is a Baumol strategy that ensures a company competes on price in order to increase market share at the expensive of margins. Mostly, this practice is the preserve of multinational companies that have scale economies and absorptive capacity (a loss in one geographical market does not hurt the entire group). In the case of BAT Zambia, the company reduced the price of Pall Mall as a measure to maintain its sales volumes resulting in a gross profit decrease of K21.1 million, which partially offset with a price increase on Dunhill.

We will continue to review the performance of BAT Zambia once the annual report for 2017 comes out. No doubt, the next AGM will be a hot one. Shareholders with annual report memory will remember the following: 2016 (Profit K34m), 2015 (Profit K61m), 2014 (Profit K76m), 2013 (Profit K102m) and 2012 (Profit K79m).  The question on their minds will undoubtedly be “Who smoked out value?”.

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