Listed beer maker Lion Brewery Ceylon’s 75 million litre per annum brewery is back in full operation after floods in May 2016 shut it down for nearly six months. Sales of popular local beer Lion, and Carlsberg, plummeted despite tax concessions to import beer for resale here.
7 feet
Height of the flood waters that inundated the brewery
57%
Drop in beer sales to Rs15 billion in the nine months to December 2016
130%
Drop in profits to a Rs613 million loss at end-December 2016
Impacts from floods and high tax on Lion Brewery is temporary, says Fitch
The credit rating agency expects sales to boom from 2017 due to rising incomes, urbanisation and tourism
Floods invaded listed Lion Brewery Ceylon’s beer-making facility in May 2016, impeding operations for nearly six months. Shareholders responded by exiting the stock, but credit rating agency Fitch Ratings Lanka thinks the damage is temporary. Before the floods, Lion Brewery was taking a big hit from a tax policy that made ‘hard’ liquor like arrack cheaper. Since September 2015, the tax on beer increased 70%, driving down beer industry volumes by 40%, the company said in its December 2016 quarter filing. Taxes on arrack increased by just 25%, but sales grew 14% as consumers switched from beer. The Kelani River breaking banks is an annual occurrence during the south-western monsoon, inundating homes and roads for several days at Biyagama, a manufacturing zone 50 minutes west of Colombo.
For 18 years, the floods never bothered the brewery there operated by Lion, a unit of listed conglomerate Carson Cumberbatch. The brewery was well protected by a flood-proof wall and pumps diverting any seepage back into the river. However, these proved ineffective when the south-western monsoon brought two whole days of non-stop rains in 2016, inundating the brewery with flood waters reaching up to seven feet.
The flooding destroyed machinery, equipment and stocks on the ground level of the brewery, leaving enough beer for just 15 days demand. It took Lion Brewery about six months to normalise operations, according to available quarterly results filed for December 2016 and published in February 2017. Shareholder reaction to the flood’s impact on Lion Brewery was negative. The share price fell 14% from 17 May to 30 September 2016, as sales dropped 47% during this period and profits by 175%.
During all this, Fitch Ratings Lanka remained unmoved. Despite the flooding, the brewer’s AA- rating was maintained with a Stable outlook, meaning that Fitch saw no reason to believe the rating would change in the short term. “Lion’s credit profile is supported by its market leadership, entrenched domestic brands and limited product substitution due to the high technical competence required for brewing beer in contrast to manufacturing spirits,” it said.
Lion Brewery operates a plant brewing over 75 million liters of beer annually for two popular labels, Lion and Carlsberg, bottled and canned at its Biyagama plant. Its brands include Lion Lager, Lion Stout, Lion Strong, Carlsberg and Carlesberg Special Brew. Lion Beer, brewed to a 160- year recipe introduced by British occupiers, is popular among locals and tourists, and is exported to the US, Canada, the UK, Japan and the Maldives in small quantities. Exports contribute less than one per cent to total revenue, amounting to Rs35.5 billion in the year ending March 2016.
To prevent local sales from going under, Denmark-based Carlsberg, which holds 25% of Lion Brewery, deployed four breweries it operates elsewhere in Asia to brew Lion Beer for the Sri Lankan market.
Sourcing raw materials and the brewing process took weeks. Lion Brewery quickly restored its boilers, generators and pumps destroyed by the flooding, but replacing electric equipment and panelling took longer as it was sourced from overseas and made-to-order. By end-December 2016, the company had imported beer worth Rs687 million for resale here. For Fitch Ratings Lanka, the flooding and high taxation were temporary setbacks. “Beer sales will recover from 2018 financial year (which starts in April 2017) onwards, supported by rising urbanisation, increasing tourist arrivals and higher per capita income, helping the company gain lost market share,” the rating agency said in an August 2016 rating report.