Last week British American Tobacco Uganda (BATU) released its performance results for 2023 reporting that due to a reduction in cigarette sales volumes- its revenues and net profit had each reduced.
BATU reported that gross turnover reduced 13.6% from UGX99.5 billion in 2022 to UGX86 billion in 2023 and as a result, net profit went down by 10.1% from UGX9.9 billion to UGX8.9 billion.
In what has now become a more than decade-long cry song, the company blamed the poor sales on the persistent illicit tobacco products trade that it said constitutes about 29% of the industry and costs the government an estimated UGX30 billion annually in uncollected tax.
But even more importantly, what the company didn’t say is that both the turnover and net profit for 2023 are the lowest ever since 2016 when the company finalised a decade-long restructuring process that was meant to create a leaner and more profitable company. Instead what we are seeing is a company that seems to be on a deceleration path.
But let us first go back in time.
When BATU was listed on the Uganda Securities Exchange (USE) in 2000, it was a bustling company with a 73-year legacy in Uganda- since 1927. Its operations included a leaf-growing operation in West Nile, Bunyoro and Kigezi regions. Part of the leaf was processed into cigarettes at the company’s Jinja factory, while the rest of the leaf was processed at its Jinja Road green leaf processing plant for export.
The company according to its 2021 annual report, had 551 permanent staff and 2500 casual and seasonal workers⏤ altogether 3,061 employees. However, soon after listing, the company quickly went down from a more than 7-year profit run, posting its first loss in 2022. For 5 straight years, between 2002 and 2006 the company’s turnover was by and large stagnant and as such the company made losses all throughout. By the end of 2006 it had made perhaps one of its largest losses, amounting to UGX10.1 billion. Cumulative losses in the 5 years stood at UGX27.5 billion.
To cut the mounting losses, the company closed its cigarette factory in Jinja and transferred all cigarette manufacturing operations to BAT Kenya as part of what it said was a business optimisation process. The company also said it had changed its strategy to concentrate on its competitive advantage to grow, produce, process and export high-quality tobacco as well as improve on marketing its cigarette brands to Ugandan smokers. Along with the factory closure, the company had by this time, reduced permanent staff to 182 and seasonal staff to 1000- a reduction of approximately 70%.
In the 8 years between 2006 and 2013 the company prospered with turnover more than doubling⏤ from UGX132 billion in 2006 to UGX270.1 billion in 2013. Profitability grew into double digits for much of this period. However, the leaf business was limping with much of the profit coming from the cigarettes business.
Closure of the leaf business
Mid 2013, the company decided to sell off its leaf processing plant in Kampala saying the plant did not have “the capability to continue processing the crop to international standards” due to installed equipment being obsolete, and unable to handle the crop to international quality expectations and timelines and that it was not financially viable to invest in a new plant given the size of the leaf crop. The plant had also become notorious for polluting the city.
BAT would instead export the dried leaf directly to buyers abroad. This led to 26 permanent job losses.
Without the leaf processing plant, it therefore didn’t come as a surprise when in August 2014, BATU further announced that it would no longer buy tobacco leaf from Ugandan farmers in Bunyoro and West Nile after 2014. A few months before that, it had also stopped its leaf-buying activities in the Kigezi region. This marked the end of contract farming by BATU.
BATU passed on the leaf growing and buying operations to a global company known as Alliance One International, which had just entered into an arrangement to sell leaf to British American Tobacco Global Leaf Pool Limited (GLP), a subsidiary of the parent British American Tobacco Plc.
BATU assured stakeholders the move was good for the business since BATU was losing money in the leaf business. For instance, BATU said that in 2013, BATU’s gross revenues were UGX 270 billion and with the cigarette revenues contributing UGX131bn and export of the leaf bringing in UGX138bn- despite bringing in about 50% of the revenues, the leaf business only contributed about 10% of the profits.
Leaf operations, the company said were cash-heavy and therefore getting rid of them would leave the company smaller but healthier. The company promised shareholders that without the cash-intensive leaf operations some of the key cost centres such as heavy foreign exchange losses suffered in the leaf export business as well as finance costs to service loans given to farmers, and expenditure staff would all be no more. The post-restricting BAT only had a workforce of 30 people whose work was to run the cigarette-importing business from Kenya and oversee the sales process. Much of the sales process too had been outsourced to third-party distributors.
Commenting on this latest round of restructuring, Hon. Elly Karuhanga, the Board Chairman in 2014: “with the closure of our leaf operations in Uganda, a source of considerable volatility, risk and overhead has been removed. We will now focus on the more profitable cigarette business which should over time deliver a more sustainable return to our shareholders.”
But a closer look at the company’s performance between 2016 (when the restricting process ended) and 2023 suggests the promised sustainable return to shareholders may as well be a smoky promise.
For example, the numbers show, that between 2016 and 2023 turnover has declined by 37.8% from UGX138.3 billion to UGX86 billion. The compounded annual growth rate (CAGR) in turnover has been -5.8%.
In fact, UGX86 billion is the lowest turnover, ever since the company listed in 2000. While the company has been profitable between 2016 and 2023, profitability growth has been erratic with a CAGR of just 1.7% in net profitability across this period. The problem seems to lie in erratic cigarette sales performance- at least for 5 of the 8 years, the company has alluded to low sales volumes in its annual reports, without saying how much exactly. But perhaps more importantly, even if the company loves to overstate the impact of illicit trade, there is an even bigger risk to BATU’s future- there are fewer and fewer smokers every other year.
A dwindling smoking audience
A Global Adult Tobacco Survey (GATS) report for 2013 done by Uganda’s Ministry of Health, together with the Uganda Bureau of Statistics, the World Health Organisation, CDC Foundation and the Centres for Disease Control and Prevention reported that 7.9% (1.3 million) of Ugandans aged above 15 were using tobacco products. Overall only 5.8% of adults (above 18 years) were using tobacco products and of these, 5.3% smoked cigarettes, with the rest using other tobacco products.
GATS is one of the components of the Global Tobacco Surveillance System (GTSS) established by WHO, CDC) and other partners to systematically monitor adult tobacco use (smoking and smokeless) and track key tobacco control interventions.
However, according to Dr Hafsa Lukwata, Head of the Ugandan Health Ministry’s Mental Health Division, there has been a 51% drop in the prevalence of tobacco smoking between 2014 and 2022.
“Since the law came into force, smoking prevalence has fallen from 7.9% in 2014, to 3.8% in 2022,” she says.
She is talking about the Tobacco Control Act 2015, which came with a raft of measures aimed at controlling smoking.
Tough legislation aside, Tobacco is its own enemy. It kills its consumers.
Data available from WHO indicates that in Uganda, 26% of deaths due to cancers of the respiratory system and 14.0% of deaths due to other respiratory diseases were attributable to tobacco (WHO, 2011). Tobacco use is a major cause of Non-Communicable Diseases (NCDs), which account for 25 % of all deaths in Uganda, with exposure to tobacco use as a major risk factor (11). Evidence from the Uganda Cancer Institute (UCI) shows that every one out of four lung cancer patients were tobacco users and 20.0% of patients with oesophagal cancers were tobacco users; moreover, 16.0%, 13.7% and 12.6% of those with oral, stomach and throat cancer used tobacco formerly (12). In addition, 45.0% of all the male Chronic obstructive pulmonary disease (COPD) patients at Mulago (the largest hospital in Uganda) were attributed to tobacco smoking.
While the GATS study for 2023 is underway and results are to be known this year, according to the World Health Organization (WHO) tobacco trends report released in January 2024, numbers and trends for 2022 showed that there was a decline in tobacco use, with about 1 in 5 adults (20%) worldwide consuming tobacco compared to 1 in 3 (33.3%) in the year 2000.
Lastly, even if no one will admit it, going by the frequent movements in especially BATU’s senior leadership, there is smoke in the kitchen. Between 2016 and to date, BATU has had 4 CEOs. Dadson Mwaura who was the CEO for only 2 years from January 2015, left in December 2017. He was replaced by Mathu Kiunjuri, who has at first the Trade Manager until August 2020 when Kirunda Magoola was appointed Managing Director. Magoola would resign in less than 3 year, in May 2022. BATU recalled Mathu Kiunjuri to run the business.
We reached out to BATU’s Kiunjuri on what his plans are to stem this worrying turn of events, but for two weeks now, there has been no response despite the company spokesman promising one.