The

POINT
Bulletin of the Institute of Economic Affairs [ Issue No. 53 : July 2002

Regulating Competition in
Kenya’s Beverages Industry
Public attention towards the bottled beverages sector was recently raised by
the announced alliance between Castle Brewing Company (Kenya) and the
East African Breweries Ltd. The Institute of Economic Affairs held a public
forum on the 5th June 2002 to facilitate policy discussions on the
implications of the observed consolidation within the bottled beverages
industry generally. The forum was addressed by Mr. David Ong’olo
(Principal Consultant, Spellman and Walker Ltd.) and Mr. Peter Kuguru
(Managing Director, Softa Bottling Company). The Point highlights the
regulatory, consumer and competition issues below.

INSIDE THIS ISSUE Introduction effectively reverting to a monopoly

Introduction 1
T he beverages industry
constitutes a significant
portion of the manufacturing sector
status.

Kenya’s bottled beverages industry is

in Kenya and therefore contributes also composed of the Carbonated Soft
Facts on Beer 2
Industry towards employment, revenue Drinks portion. Within this industry
collection by government and the are the two main competitors and
Implications of the 3
export of products to earn foreign they differ in size, scope of operations
Alliance
exchange. It is also an industry that and business strategy. The dominant
CSD 5 market player here is the Coca-Cola
has linkages with other sectors and
Policy Lessons 7 industries such as transportation, corporation with bottling plants and
glass making and advertising. marketing facilities throughout the
country.
The announcement of an alliance
between the two beer- On the other hand, the smaller and
manufacturing firms in Kenya more recent market entrant is the
greatly raised the public scrutiny of Softa Bottling Company which was
the industry. This alliance raised incorporated in Kenya in 1998. From
more concerns because it bore this background, it is clear therefore
obvious implications for that the industry as a whole and its
competition, investment and portions are quite concentrated and
consumer choice not only in Kenya this provides justification for careful
but also throughout the East scrutiny of the events within the
This Bulletin has been
African beer market. While the country and outside the country as
published with funding main and full details were not these may significantly affect the
from the i mm e d ia t e ly a va i l a ble, th e industry and the consumers of its
immediate inference was that the products.
Centre for International
beer market in Kenya was
Private Enterprise (CIPE)

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 Relevant Facts on Beer Industry presented either in the absolute terms in millions

B efore a comprehensive analysis of the

possible effects on the consumers and
implications for competition policy are
of hectolitres or more usefully presented in the
form of per capita consumption by dividing the
absolute consumption. In absolute terms
discussed, it is altogether necessary to consider however, the consumption of beer is highest in
the performance of the beer industry and other America though per capita levels of consumption
material facts that may have prompted the put Europe in the lead.
alliance. Among the main characteristics of the
beer industry is that the market throughout the Within Africa, there is further geographical
world has been undergoing increased disparity in consumption with the least
consolidation. Evidence for this phenomenon is consumption being in the Northern regions and
seen in the increased mergers and acquisitions the most in Southern Africa. In all, while Africa’s
that have characterized the main beer level of consumption represents less than 5% of
manufacturing and marketing firms in the world. the worldwide beer production, it is the one
geographical area besides Asia that presents the
In addition to the increasing rise in consolidation, highest potential for growth.
beer markets have also shown that main
marketing advantage is derived from building of In general terms, the beer industry throughout
strong brands. For this reason, the character of the world is marked by fairly high barriers to
domestic markets is determined by the main entry. The amount of expertise and equipment
brands available in each country with a required for the manufacture of beer products
secondary market for imported brands. With this present formidable initial barriers to entry into
factor in mind, it is hardly surprising that the industry because of the high cost of
penetration of markets for new entrants is establishing a manufacturing plant. Industrial
considerably difficult. Beer manufacturing firms and competition policy of individual countries
therefore prefer to takeover or conclude merger also counts a lot towards the erosion of these
agreements with the firms that already produce initial barriers. The capital requirements for
beer within countries so that there is no need to establishing a beer manufacturing plant
commence the expensive process involving precludes the existence of many plants because
development of new brands to compete the more the markets in developing countries are often
established ones. As a result, the Beverage World restricted primarily by the incomes of the citizens
International Magazine reports that by 2000, the rather than by the existence of real competition.
ten largest brewing firms accounted for 43% of
worldwide production. Ü The Kenya Market
Coming back to Kenya’s domestic market, it is
Additionally, the largest manufacturing firms instructive to note that beer manufacturing and
also have the most intricate and effective marketing has undergone a number of phases of
distribution facilities. Therefore, the ability to development. Of importance is the fact that
distribute effectively is an indispensable part of a before independence and soon thereafter, there
successful marketing strategy. This implies that were a number of independent brewing and
with the main firms merging operations, marketing companies. Each of these companies
establishing strategic alliances and engaging in sold a limited number of brands with some of
joint investments, the landscape is shifting them having single brands within the market in
proportionally towards the domination of larger Kenya. At the same time, there was limited
firms. export and import activity taking place.
However, over time, these independent
Consumption of beer varies widely according to companies were all bought by the main beer
regions but is understood to correlate highly with manufacturer to the extent that by the 1980s, the
income levels and other cultural factors. industry was characterised by a monopoly.
Generally stated, beer markets are most matured
in the European continent and are followed by The liberalization process substantially reduced
Australia and the North American region. The the administrative barriers to entry into the
measurement of beer consumption is mostly Kenyan beer market and thus precipitated the
entry of Castle Brewing Company in 1995. With a

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 new entrant into the beer market in Kenya, there For this reason, the market structure and
was an appreciable level of competition as the dynamics for pricing call for increased vigilance
incumbent tried to retain market share while the to ensure that the dominant market position is
new entrant sought to acquire a section of the not used to raise prices since the opportunity for
market. This altered market structure was doing so has been taken away. Furthermore, it is
accompanied by an expansion in the range of unlikely that imported brands will be able to
products available to consumers within the offer meaningful price competition unless the
market. In order to cope with the existing monopoly company raised prices by wide
competition, both companies resorted to margins.
aggressive marketing of beer products and to
innovation by the introduction of new products Other subsidiary concern about brewing arise
such as unmalted beer to capture and expand the from the likelihood that the East African
market. Breweries Ltd, will rationalise the portfolios of
Castle Brewing. The rationalisation of the Castle
Castle Brewing Company faced difficult market Brewing portfolio necessarily confers an
conditions not only because it was faced with a advantage upon the competing brands from the
more established competitor, but also because the East African Breweries Ltd because the only
period of its entry coincided with the general competition then would have to be from
economic decline and reduced growth of the imported beer.
Kenyan economy. Castle Brewing company’s
position was further aggravated by the fact that Ü Wholesaling and Distribution
government retained taxes on its principal inputs To the extent that distribution channels are an
such as barley which it imported into the important part of the marketing for beer
country. Its competitor on the other hand had manufacturers, the alliance will affect the
entered into contracts with farmers hence could dynamics for distribution. It is imperative to
source barley within the country. This factor consider whether the alliance may provide
further emphasises the integrated structure of the reduced competition in the wholesaling and
beer industry in Kenya because it illustrates the distribution of beer as a result of East African
vertical integration in the sense that the market Breweries Limited having taken the distribution
leader has greater access and control of the major and wholesaling operations of its competitor.
inputs. Besides the rationalisation of brands, the
monopoly brewer may be expected to reduce
Implications of the Alliance distribution costs further through the cessation of
Ü Brewing distribution agreements with some distributors
Since it is known that there are already that had entered into agreements with its
formidable barriers to entry into the beer competitor before the alliance was concluded. In
manufacturing industry, the alliance between the this manner, the market structure that results
companies has definitely increased those from the alliance may lead to increases in the
barriers. To the extent that the alliance effectively barriers to entry for distributors and wholesalers
handed over the manufacturing plant and of beer.
marketing of the products of Castle Brewing to
the competitor, it can be surmised that they are Another critical issue for the consumer and for
guardians of one another’s markets. A new possible entrants to the beer market in Kenya is
entrant would therefore face competitive the question of pricing. Being a monopoly that is
pressure from two firms with coordinated marketing its own products and that of a
marketing and manufacturing operations. In the company in which it now has a substantial stake,
premises, the penetration into the industry will the possibility for cross- subsidisation and
be unduly difficult. On the other hand, it is discriminatory marketing is relevant. There will
possible that there may be an expansion in essentially be no competition on the basis of price
brewing though this is unlikely in view of the for beer since all brands will be produced by the
claim that the primary reason for the exit by single manufacturer and marketer. The only
Castle Brewing was the low demand for beer competition that may be expected will come from
within Kenya. imported beer brands which are not well placed
to provide price competition because of the

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 strength of local brands and the low level of power can be seen in the fact that all products are
consumption. However, the East African produced by a single brewer hence the possibility
Breweries Ltd. is unlikely to cross-subsidise of resorting to a competitor is non-existent. In the
products and offer differential discounts since it circumstances, it is possible for the manufacturer
has no incentive to do so. to discriminate against smaller traders on the
basis of volumes sold or in terms of their
Ü Retail locations. There is no evidence as yet that the
It is also important to consider to what extent the remaining manufacturer has reason to do this but
monopoly may extract profits by lowering the it may constitute a barrier to entry for a new
prices of its main brands or artificially raising the entrant because of the possibility of foreclosure
prices for Castle Brewing products in order to in the distribution and retail channels.
confer sales advantage to its main brands. The
motivation for this behaviour would Ü Public Interest
disadvantage the consumers of the Castle Granted that the alliance between the Castle
Brewing products and thereby entrench its Brewing company and East African Breweries
products at the expense of its competitor. The Ltd reflect the benefits related to increased
known circumstances of the alliance show that efficiency in production and resort to capital
this incentive would be lacking on the part of a intensive investments, there are effects that bear
monopoly for one principal reason. The on the consumers of their products and to the
complicated alliance involved the exchange of public at large. Because the alliance required the
20% shares in each other’s subsidiaries and complete closure of the Kenyan manufacturing
therefore created the motivation for each of the plant by Castle Brewing in exchange for the
firms to maximise sales. Naturally therefore, each closure by East African Breweries Ltd of its
of these firms has a substantially high interest in manufacturing plant in Tanzania, there were
the other’s operations to forestall any unfair trade inevitable losses in employment.
practices. In light of the convergence of their
interests, it is altogether unlikely that significant While the applicable law is the Restrictive Trade
price competition will be seen between their Practices, Monopolies and Price Control Act (Cap
products in the Kenyan and Tanzanian beer 504), the alliance between the Castle Brewing
markets. company and the East African Breweries Ltd is
not a case of wholesome acquisition or merger.
Since each of the independent companies had a As required under the relevant Kenyan law
number brands that were in competition with governing mergers and takeovers, an analysis of
one another, the new market situation may the alliance should require consideration against
require that some level of product rationalisation three broad benchmarks under section 30(a) to
be undertaken. The most visible effect of the (c).
alliance was the reduction in product range as
this rationalisation was undertaken. The Specifically, these three measures require
rationalisation of brands may imply efficiency in consideration of a merger in terms of the export
the use of resources in order to concentrate on the advantages that it confers on the country, the
brands that have the most demand within the extent of reduction in competition within the
Kenyan market. Despite this argument on domestic market and the extent to which it
efficiency, the consumers have experienced a encourages capital intensive technology over
reduction in the choice of products available to labour-intensive production. Assessed against
them. Over time, it is possible that consumer the benchmarks set by Section 30(a) to(c), of the
choice may be further limited with increased Restrictive Trade Practices, Monopolies and
rationalisation and reduction in the number of Price Control Act (Cap 504), it is evident that
products available to consumers. there are definite efficiency gains and possibility
for export of beer into the international market.
Because most of the beer sold in Kenya is However, in view of the lessened competition
consumed in relatively small retail outlets, there and the resort to capital efficient production
is the likelihood that the reversion to a monopoly methods that shall be adopted, the decision to let
has affected the power of individual retailers the alliance to pass the test would be close. This
within the new market structure. This shift in inference takes cognisance of the fact that the

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 operational law has a definite slant towards market position of Coca-Cola as an international
protectionism and favours a labour intensive company with a long history in Kenya.
mode of production over capital intensive
production. On the basis of these absolute numbers it is clear
that the Coca-Cola franchises put together are far
Other adverse effects to the public interest and to bigger than their sole competitor. The
consumers in particular inhere from the significance of the entry by the Softa Bottling
reduction in the product choice. Taken together Company into the market can be assessed for the
with the fact that there will be virtually no price fact that there was an escalation in the
competition, it is obvious that consumers will advertising and marketing by both firms soon
pay a double cost for the reduction of brands and after the new entrant commenced manufacturing.
the ability to choose products on the basis of This escalation in marketing from both
price. At the retail and the wholesale level, this companies suggests there was competition for
implies that the public choice of products will be the retention of market share by the Coca-Cola
determined by the brands that the monopoly will company and for the acquisition of market share
want to sell in the market. Public interest may by the Softa Bottling Company. Evidence of the
also suffer from the lack of motive to innovate. intense marketing that ensued could be surmised
The sole manufacturer of beer products will have by the introduction of a new distribution system
less incentive to undertake further innovation in and the assignment of market impact teams.
the products for as long as the brands that are
within the market are sufficiently profitable. Ü Market Presences
The Carbonated Soft Drinks industry is a capital
The Carbonated Soft Drinks Industry intensive one that requires a lot of expenditures

T he Carbonated Soft Drinks industry in

Kenya is presently characterised by
competition between two firms of varying sizes,
in order to ensure brand recognition. Such high
initial costs are a definite barrier to entry before
the consideration of fairly high marketing costs.
products range and business strategies. Since Over time Softa Bottling Company began to lose
independence, there has been limited the market share that it had acquired because it
competition to the Coca-Cola Company by other tried to adopt the same expensive advertising
firms but by the 1980s, the Kenyan Carbonated techniques that its larger and more financially
Soft Drinks market was a virtual monopoly. Most endowed competitor did. Within a year of its
of these earlier competitors were confined to entry, its initial market presence was steadily
specific sections of the country and did not have eroded with the result that it was completely out
as much reach as their main competitor. Globally, of the market. Softa Bottling Company made
the Carbonated Soft Drinks market is dominated claims that its competitor was using restrictive
by a few international companies which have trade practices to curtail the growth of its market
franchises in most countries. In this sense, the share.
carbonated Soft drinks market differs
substantially from the beer market because the Other claims were that there smaller company’s
leading beer manufacturing companies in most capital investments were being eroded through
countries are local. However, the Carbonated bottle buying by a third party were also made to
Soft Drinks market is more consolidated because the Monopolies and Prices Commissioner.
the market leader operates virtually throughout However, in the absence of real proof of
the world. deliberate and harmful actions that could be
attributed to any competitor, no material course
Ü Entry of Softa Bottling of action arose.
In 1998, Softa Bottling Company entered into the
Carbonated Soft Drinks market in Kenya. This Ü Direct Sales
entry is significant because the new market Being the smaller company, the Softa Bottling
entrant was wholly owned and incorporated in reoriented its strategy towards direct sales at
Kenya. Softa Bottling Company started the points of high concentration of people who
manufacture and marketing of Carbonated Soft would be targeted to maximise sales. This
Drinks with the full awareness of the entrenched strategy was informed by the realisation that
being the larger competitor, Coca-Cola had far

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 Table 1: Mean Household Expenditure in Kenya (April 1994 Prices)

Sub-Group (food items) Mean Annual Expenditure (Kshs) %

Bread & Cereals 9,943 12.0
Meat, Chicken & Fish 5,703 6.9
Dairy Produce & Eggs 4,643 5.6
Vegetables 4,562 5.4
Sugars, Spices, 3,417 4.0
Oils & Fats 2,558 3.1
Meals Consumed Out 2,057 2.5
Fruits 1,053 1.3
Roots 936 1.1
Soft Drinks 420 0.5
Total Food 35,293 42.4
Alcohol 517 0.6
Total Non-Food 47,709 57.6

Grand Total 83,302 100.0

Source: Republic of Kenya (2002), (Central Bureau of Statistics): Urban Household Budget Survey 1993-1994. P.35
(Table 5.2)

Table 2: Comparative Figures for Beer Production in East Africa (1980-1996)

Kenya Tanzania Uganda

YEAR Volume (Hl) Excise (Ksh.) Volume (Hl) Volume (Hl)
1980 2,324,330 17,033,000 638,277 131,800
1982 2,337,360 17555000 641,887 97,871
1984 2,303,450 16,387,000 691,812 148,166
1986 2,926,330 20,180,000 651,782 70,354
1988 3,143,820 23,819,000 529,955 206,038
1990 3,311,140 20,686,000 450,441 194,210
1992 3,686,480 190,367,000 493,939 187,180
1994 3,025,010 284,696,000 523,502 308,220
1996 2,900,000 - 1,221,307 512,380

Source: www.dur.ac.uk/history/web/beertable.htm

Table 2 shows a decline in the volume of beer production from 1992 while the excise collection has risen substan-
tially

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 more resources to dedicate to the aggressive published regulations on take over and mergers
marketing that characterised the competition. through the stock exchange. While giving credit
These direct sales were achieved through that the rules are broadly acceptable, it is
vendors who sold the soft drink carried on significant to note that they do not establish a
pushcarts and wagons. In order to service the mandatory link with the Monopolies and Prices
vendors, the Softa Bottling Company put up Commissioner. It is therefore clear that the sector
mini-depots for servicing the vendors and paid regulator has authority over the administration
direct commissions for daily sales. Its of rules and regulations affecting competition
competitive edge now centred not only on price without the prior requirement to link with the
but also on the service to suburban areas of Monopolies and Prices Commissioner’s office.
Nairobi and the industrial area that has a large This has the effect of fragmenting the
concentration of workers. competition policy and providing the small but
real probability of conflict and inconsistency in
Ü Price Competition laws.
The price advantage by Softa derives mostly
from the resort to limited advertising and the Ü Multi-lateral Policy
savings are then passed on to the consumer in As presented, the alliance not only involved a
terms of lower costs for the drinks. In share swap of 20% between subsidiaries of the
comparison to the competing products two companies, it also involved the simultaneous
manufactured by its competitor, the prices for withdrawal from specific markets. Even without
products by Softa Bottling Company reflect very the more detailed information of the transaction,
little advertising costs. the effect of such a swap is to significantly reduce
competition between the two firms. This
Policy and Regulatory Lessons for situation also reveals the cross-border character
Kenya’s Beverages Industry of the transaction completed in Kenya. For all

T he review of the beverages sector practical purposes, this portion of the transaction
throughout the world reveals that it is appears to have resulted in a division of the east
particularly prone to high concentration. It also African market between the two firms. By
becomes evident that both the beer and retaining an interest in one another, it is obvious
Carbonated Soft Drinks industries are that no competition would be possible. However,
characterised by high barriers to entry. This with the impending development of a
places an obligation on government to facilitate multilateral competition policy, it can be
entry whenever possible and to position the envisaged that an institution particularly placed
competition law and policy to enable meaningful for enforcement of competition policy in such
and appropriate intervention. This necessarily instances will be in place. As the East African
requires that the guiding principle should be in Community continues to be integrated in trade,
looking out for the conduct of players in the business alliances with cross-border effects will
market and to enforce fair play. This principle is be more prevalent.
acknowledged as the most efficient because it
concentrates on the anti-competitive conduct by Ü Undertakings
any player where the market is concentrated. The comparative size of the Kenyan market may
have prompted the alliance between the two
Ü Consolidating Policy competitors. To the extent that this explains part
Manufacturers of the motivation, it would be difficult to refuse
The alliance between the only beer marketers did the alliance altogether. However, a proper
clearly expose the lack of institutional analysis of the numerous anti-competitive effects
preparedness to smoothly handle such should have called for specific undertakings from
transactions. For instance, it is obvious that the both firms before the alliance would be
Capital Markets Authority (CMA) did not have sanctioned. This is important because besides the
sufficiently elaborate regulations to oversee the competitors, affected parties include the
transfer of shares by the East African Breweries consumers of beverages whose interests in
Ltd. which was quoted on the stock exchange. quality and affordable products have been
Since then the Capital Markets Authority has affected by the new market structure and the
marketing arrangements. In consideration of the

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 merits of the application to conclude the alliance, Kenyan economy in general will be left to the
a more incisive consideration of the effects on dominance of monopolies and companies in
consumers should have counted. This case collusion with one another. This is an especially
proves that the enactment of a law for the important point because the costs of anti-
protection of consumer interests is now a priority competitive behaviour are high and equally
in order to forestall the bypassing of legislation. adverse to growth and further investment.
Considering that the investment by Castle
Ü Law and Regulatory Reform Brewing Ltd was one of the single largest over
The Restrictive Trade Practices, Monopolies and the last decade, the departure of the firm raises
Price Control Act (Cap 504) was enacted well significant questions about the ability to support
before the liberalization in the economy investments within Kenya. It should therefore
commenced. In many areas of competition, the concern policy makers and the government that
law is limiting and has no scope for action either this investment was withdrawn without a
in the public interest or for the effective compelling reason being offered for it.
protection of the competition process. Besides the
lack of a clear mechanism for working together Conclusion
with sector regulatory institutions that were
created after it’s enactment, the scope of action of
the Commissioner is severely limited in the Act.
C onsidering the tendency for heavy
consolidation within the beverages
industry, it is imperative that the existing law
Law reform is therefore required to secure the should be reformed to not only protect the
autonomy of the institution from the Minister for competitive process but also to protect the
Finance, to establish a reporting mechanism for interests of consumers by forestalling collusion.
parliamentary oversight and to adequately The enduring lesson is that coordination between
provide resources for it to undertake the the Monopolies and Prices Commission and
complicated work that falls in its charge. other sector regulators is not unequivocally
established in law and this may allow for the
Such law reform must therefore establish the exercise of monopoly power. As the World Trade
institution as a full commission and allow it to Organisation (W.T.O) prepares to commence
exercise authority in the enforcement of negotiations on a multilateral competition policy,
competition policy for all industries and markets Kenya would be best placed to protect its
in Kenya. In addition, the institution that interests at that level only after establishing a law
enforces and the competition policy and law that properly regulates competitive conduct for
must have working linkages with sector international and local companies within the
regulators and other authorities based outside country.
the country.

Ü Investment Protection
As government endeavours to attract foreign
direct investments, it is essential that the A Comprehensive Report of the
competition law must be used to moderate the meeting is available from IEA
conduct of entrenched firms that may frustrate offices.
new and smaller entrants. Without this, then the

The Institute of Economic Affairs (IEA) is a civic forum which seeks to promote pluralism of ideas through open, active
and informed debate on public policy issues. It advocates liberal values in society, individuals’ economic, social and
political liberties, property rights, democratic government and rule of the law. The IEA is independent of political parties,
pressure groups and lobbies, or any other partisan party.

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