BATU: From highest taxpayer to sales agent

As British American Tobacco Uganda closes in on 90 years of existence, the company has shrunk both capacity and spread.
At the end of 2015, the company will no longer be contracting farmers to grow tobacco leaf as it will only be distributing cigarettes imported from other subsidiaries, including Kenya.
Batu was once Uganda’s largest taxpayer, manufacturing cigarettes, buying tobacco and distributing brands such as Dunhill, Sportsman and Safari among others.
However, manufacturing and leaf buying have been closed with the company shifting focus to distribution and sales.

End of manufacturing
In 2005, Batu’s board, then chaired by James Mulwana (RIP) made a decision to halt cigarette manufacturing in Uganda, moving the segment to Kenya with a view of ‘optimising business processes to ensure long-term sustainability’.
The process marked the end of cigarettes manufacturing at the Jinja factory as the company sought to centralise its cigarettes manufacturing in East Africa in order to compete effectively. At the time, at least 135 jobs were affected.
“… management took the bold decision to restructure and reorganise the business as the year came to a close. This included a rather inevitable but painful decision to reduce the human resource to partly re-align its administration costs with realistic business performance,” Serhat Eroglu, the then managing director said in the 2006 annual report.
The decision could have been informed by continued poor performance given that in 2004, the company made a loss of Shs5b and nearly doubled in 2005, before rising to Shs12b in 2006.
However, after the restructuring, Batu, in 2007 recovered from the losses attributed to the newly adopted model.
The company in 2007 was able to save at least Shs3b ($1m) by shedding off the manufacturing arm, improved warehousing and exporting more tobacco leaf.
With the closure of the factory, Batu aggressively pursued contract farming for its rising tobacco leaf business, which had become the new cash cow of the business.
In 2008, the leaf business generated Shs92b in revenue, a decline from Shs102b in 2007. The cigarette segment was also at the time contributing at least Shs89b.

The leaf struggles to impress
Not considering that tobacco leaf buying had been daunted as the company’s new cash cow, the venture proved expensive.
In 2013, export sales from the leaf business stood at Shs138.9b but the company incurred an operating loss of Shs17b. The loss was partly attributed to the rapid appreciation of the shilling by about 10 per cent during the year.
This would usher in more restructuring with the leaf processing segment moving to Kenya, which meant Uganda would only export unprocessed tobacco leaf.
According to the 2014 financials, Batu’s leaf business posted one of its best results at Shs205b, generating a profit of Shs37b.
However, in a surprise move, Batu in 2014 announced it would no longer contract farmers to grow the tobacco and sold off the processing facility to Alliance One International.
“We will now focus on the more profitable cigarette business through improving our distribution capabilities, building brand equity and growing value and market share,” Elly Karuhanga, the Batu chairman, wrote in notes accompanying the 2014 annual report.
Once heralded as the future of Batu, the leaf business had not delivered to expectation. However, with focus now shifted, distribution of cigarettes started to show a growing trajectory in 2012.
Batu, for instance, posted Shs137.7b, Shs131b and Shs63b in 2012, 2013 and 2014 respectively with operating profits showing stability at Shs25b, Shs27b and Shs18b respectively.
As of 2015, the company had shrunk from about 130 employees to about 35
Renewed focus on distribution
A much smaller Batu is now seeking to focus on distributing cigarettes, where it believes there will be less volatility and with high returns.
The first move was to shake up management, appointing Dadson Mwaura, 42, as the new managing director.
He has been part of BAT Group since 1997 with roles in marketing, planning and consumer insights in UK, Hungary and Turkey.
His most recent placement was head of trade marketing and distribution in BAT Kenya and has been tasked to grow the cigarette business in the face of growing pressure from health activists.
“There is still potential to grow the cigarette sales business. Our distribution capability is also going to change,” Mwaura told reporters on the sidelines of the AGM recently.
He said they will leverage on the illicit market, which at the moment accounts for 15 per cent of all cigarettes consumed in the country valued at about Shs12b.
Batu together with Leaf Tobacco and Commodities run the legal cigarette business in Uganda with Sportsman taking up the largest market share at 60 per cent.
Batu, according to 2013 data provided by the company holds 80 per cent of the cigarette market share in Uganda.

The issues
How it started. Batu started with the closure of the cigarettes manufacturing segment as it sought to re-align all its manufacturing business in Nairobi, Kenya
Further closures. However, the company recently closed off its leaf processing plant, announcing it would by the end of 2015 stop contracting tobacco farmers and focus on distribution and marketing.

The challenge
Batu will have two major challenges including the end to benefit from a “natural hedge” that was being provided by leaf processing exports. The segment being an export led section would fetch in more foreign exchange but has over the years been phased out symmetrically.
The other, according to Mwaura, will be the proposed Tobacco Control Bill 2014, which seeks to regulate the manufacture, sale, labelling, promotion, advertising, distribution, public use and sponsorship of tobacco products in Uganda.
“We together with other tobacco industry stakeholders would like to see effective regulation that meets public health objectives, respects our legal rights, does not impede our ability to compete and does not damage livelihoods, such as those of farmers, traders and those employed in the sector,” Mwaura notes.

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