Illicit cigarettes a window for organised crime into Uganda -- BAT
We continue to have a decent business here in Uganda, although it has been challenging. I think for me the secret mix if ...
BAT Uganda last month released its half-year results and area director BAT East Africa market, Crispin Achola, was in town to appraise the business. Senior content producer Paul Busharizi met up with him to talk about the business. Below are excerpts from the interview.
Q: BAT has remained profitable through the pandemic, what do you attribute to BAT’s ability to operate through the pandemic and be profitable?
A: We continue to have a decent business here in Uganda, although it has been challenging. I think for me the secret mix if I would call it that, in terms of how we have navigated through the pandemic is been down to how we have looked after our people. We pivoted to working from home, for those roles that could, like administrative roles. It was quite painful because we had just refurbished our offices. So you have such beautiful facilities but we have to safeguard people first by pivoting to work from home. Certain roles that could not work from home, like salespeople, who have to go in front of a retailer or a wholesaler, we have tried to do is to provide Personal Protective Equipment (PPE). We also did provide some people even to our customers, our partner distributors. We have to look again after the whole chain. There was the whole training people to work in the environment – social distancing, masking up, sanitization, we invested quite a bit in that space.
The third area really around our people is that, as opposed to what other companies have done, we held salaries stable. We didn't cut anybody salaries, we even paid bonuses. The business could sustain it. But more important, we felt it was the right thing to do. People are at the front and center of everything we do and it was only right for us not to distract people who are already in a difficult circumstance. The ability to afford obviously does kick in, you can only give if you have. You can't give what you don't have.
Q. This speaks to the sustainability of the business, how are you managing that especially now?
A: We are serious about the environmental-social impact and governance (ESG) we believe that those are the three pillars for sustainability. The very first thing is to address the health impact of our product on consumers. We have come to the position that as much as smoking is an enjoyable product for those who choose to partake, it carries health risks, and increasingly as part of our sustainability programme we believe that we need to address that risk.
What we have done across the globe, is come up with new categories that represent reduced risk to our consumers. For example, we now have a nicotine pouch. What are nicotine pouches? Well, taking a step back, what do consumers want in our products, primarily they want the nicotine in the product. That's why they smoke to get nicotine, as a stimulant. The risky part of getting that nicotine is the burning of the cigarette because that's where all the toxins come in. So we said how can we deliver nicotine, without combustion? Through our R&D we've actually come up with a nicotine pouch, which will be the size of a chewing gum pellet. You basically put it between your lip and gum and the nicotine is absorbed directly to your bloodstream, without any combustion. Yeah, so we saw when we launched in Kenya. We've had some discussions with government around shaping regulation for this new category. So we're in the process of taking a temporary hiatus on sales while we finalise with government and regulation. The law in Uganda, at the moment, doesn't have a framework for the sale of this product, and we'll have to work obviously with the regulatory authorities to shape the opportunity to make it viable in Uganda.
Other things we're doing in ESG is across East Africa we have a big tree planting operation. Trees are used in the production of our product so we have a big tree planting operation. We are planting two million trees in Kenya annually and looking to replicate that here.
And the other one is if you walk around, Uganda, the number of people you will meet in senior positions in diverse organisations that have come out of BAT are quite a number. That's testimony that we are contributing to society hereby upskilling the workforce.
I think the other one is job creation. Yeah, we have quite a big impact in terms of the value chain, retailers, wholesalers, all of whom rely part of their livelihood to the profitability of the sale of our products directly. We have restructured our operations to be fit for purpose. And in terms of direct employment. Currently, we have about 12 people who work on the BAT office. But if you look at our distributors, the majority of our distributors, we have over 300 people directly employed, just through our, our value chain. And that's just the first level of the value chain, they are probably a few hundred more along the whole value chain.
Q. We know that tobacco regulations are very stringent. How are you working with that, what’s your attitude?
First and foremost, as an organisation we actually work on regulation. Because given the nature of our product, we believe that there needs to be a degree of regulation around it. For example, I think we all believe it's an adult product. So we believe, for example, it must be only accessible to people over 18. That's a good piece of legislation. Likewise, we believe that, given the nature of the product, there needs to be some kind of warning on the product, whether it's a pictorial or graphic health warning. We believe it must have some kind of health warning given the health risk of the product. I think the challenge we have specifically seen here in Uganda is not so much an issue with the regulation, but more of how the regulation has been implemented. To illustrate last year, government, through the Minister of Health made a decision to introduce graphic health warnings, which is a pictorial of the pack, moving away from a text-only approach, and the timelines given for manufacturers and importers to comply was quarter four of last year of 2020. But we complied. As aligned with the law. But not other players.
So for the better part of most of the year, the market hasn't been full. And you know the law cannot be, or the regulations should not be applied selectively. We have had a business impact, due to this uneven playing field because consumers have kind of gravitated to brands that have softer or no health warnings.
The second thing that we have seen here in Uganda, gradual, there’s still a situation now where we're seeing what I would call illicit cigarettes, where illicit means that they're probably not paying taxes to government. They're not adhering to any guidelines set out, by the Ministry of Health. I'm hearing in the market that have no health warnings whatsoever. I think the majority of it will probably be coming through our porous borders around, Uganda. I think the challenging issue of that we are seeing is that it has become exponential in terms of the size of the illicit cigarettes in terms of business. Yes, we did our study using a third-party agency in July of this year. And basically, we found that of the products being sold in retail, out of every 10 Cigarettes being sold three are illicit.
So that is 30% of the market, that basically is illicit. So for us at BAT, a combination of illicit trade, and an uneven playing field from a regulatory perspective, our volumes this year have taken a massive hit. Our profit is down, 50%. Our gross turnover is down 40%. But I think for me the bigger issue is that government has also taken almost a 40% hit on revenue. So for me what that literally means is that they stealing from government coffers. And I think that's very sad Uganda is a developing country, just like most African countries and this revenue can provide roads, schools, medicine and hospitals, but somebody's stealing that.
Q. Are the illicit traders part of bigger organized gangs?
I worked here in Uganda 20 years ago. Yeah. And at the time I worked in Uganda, I would say illicit trade then was anything between two to three percent. That kind of percentage level that's opportunistic traders a packet here, a packet there, crossing the border not paying tax. The people don't even know they're breaking the law. But when it starts hitting 30% Then the element of organized crime sets in. This means organizing or acquiring distribution networks. It has to be organised. But beyond it being organised. My biggest concern based on my experience in in this industry is that it is difficult to move from zero to 30. But it is easy to move from 30 to 50 percent. It can grow exponentially overnight just like that. And that for me this is really what scares me.
But also building on what we have seen in a lot of markets, smuggling of cigarettes usually ends up having links into other things like terrorism, drugs and other items that are definitely not beneficial for any country or society. The bigger it gets, the larger those kind of risks are.
Q. I noticed your revenues are down and your profits as well but you are paying more in dividends than you did last year, which was a better year, how does that work?
A: You need to take note that BAT Uganda is 90% owned by our group, and 10% of our shares sit on the Uganda Securities Exchange. We have a dividend policy that essentially that we payout 100% of all profits we make. That's a fairly aggressive policy, but we believe that that is befitting for the shareholders whose wealth is invested in the company. Every operating company has its own dividend policy. So if I just take, Kenya, as an example, our dividend policy is not as aggressive as it is here in Uganda, in Kenya we pay about 80%. Every market has its own unique operating circumstances and policies.
Q. So somebody's looking at that would say that you are not interested in growing the business, because you're not retaining earnings.
A: I wouldn't say that I would say that any decision to grow in Uganda, where we actually do have a desire we have other funding, funding mechanisms we could look at. And in the case of Uganda, we believe that if the opportunity exists to fund new investments like intercompany lending or bank borrowings.
Q. What are the three major challenges to the business aside from COVID?
I think the three key challenges for BAT Uganda, would one be the illicit trade, eating into the sector and reducing the size for legitimate manufacturers and sellers. The second one will be around pricing. We are in a COVID situation, consumers are going through a very rough economic patch. At the moment I think that consumers won't have any propensity to take pricing in our category. So we are very happy this year that the government made the decision not to increase taxes on cigarettes. We are not out of the woods, and I see next year, continuing to be a difficult one for consumers in Uganda. So my idea is, again, if government can desist from increasing taxes, it will have a major impact on the recovery of the category for consumers’ perspective. The third one would be the equal application of regulation. I think that enforcement of regulation remains a particular challenge. To comply with some of these regulations it costs us manufacturers money. So it's quite disappointing when you comply, but there's no enforcement and others don’t you have an uneven playing field. If there was one request I would have, have, from government is to drive enforcement of existing regulations, equally across more players in the market.