Beer maker South African Breweries (SAB) CEO Richard Rivett-Carnac has called on government to create greater certainty around excise tax increases going forward, stating that yearly increases that surpass inflation undermine the beer industry’s growth.
“We need, as an industry, strong policy certainty around excise tax. We know that the government is under pressure from a budgetary perspective. For ten years, we’ve seen massively inflated excise tax increases when compared with inflation. That’s against policy. And that really hurts the industry,” Rivett-Carnac said on September 6 at the SAB State of the Beer Economy event at the company’s Alrode brewery in Alberton.
The Alrode brewery is the largest brewery in South Africa and the second largest in the southern hemisphere.
Describing the current state of the beer industry in South Africa, Rivett-Carnac said, “It’s been tough. We’ve seen our consumers squeezed by high-interest rates, high inflation rates, high fuel costs and high unemployment. The impact it’s had on the total alcohol industry is that there is an approximate decline in volumes of 5%. This is a very material number for the alcohol industry.”
He said that, with the industry declining and consumers being under pressure, the industry could not afford the government veering away from established taxation policies, which he insisted was an inflationary excise increase, not more.
Over-taxation would, in Rivett-Carnac’s words, “effectively kick an industry that’s really struggling right now – an industry that’s super important to the whole country.”
Presenting the latest Bureau of Economic Research (BER) beer economy elasticities report, BER economist Linette Ellis explained that, following a record 6% decline in real consumer spending in 2020, on the back of major job losses during the Covid-19 pandemic, the introduction of the social relief and distress grant and the 300 basis point cut in the prime interest rate initially helped consumption to bounce back.
However, soaring inflation and sharp interest rate hikes have been eroding the spending power of consumers over the last 18 months. The upward adjustments to the monetary values of social grants were below the consumer price index (CPI) inflation rate, limiting the spending power of low-income consumers and hurting food and beverage sales volumes in particular.
However, she said that an improvement was expected in the coming two years, with real disposable income growth expected to regain some momentum in 2024 and 2025, on the back of lower inflation, a recovery in real wages, real increases in social grants expenditure, interest rate cuts and the implementation of the two-pot retirement system.
The 2023 update to the econometric analysis of liquor price and income elasticity was conducted by the BER for SAB. Following much lower income elasticity readings at the time, the latest study shows that the income elasticity of both beer and total liquor has increased to about 1.0.
Ellis said this meant that a 1% increase in real disposable income would typically lead to a 1% rise in liquor sales volumes.
She said that, in the long run, the price elasticity of total liquor had remained broadly unchanged at -0.5 to -0.75, but the price elasticity of beer increased from about -0.70 in 2010 to between -0.85 and -1.0.
Ellis explained that, currently, a 1.1% increase in the real price of beer over and above the CPI could be expected to lead to a 0.85% to 1% decline in beer sales volumes.
Rivett-Carnac said it was important to keep the beer industry alive and well owing to its significant contribution to the economy.
He said that one in every R79 of gross domestic product (GDP) came from beer, and that one in every 66 jobs came from the beer value chain, which amounted to a total of 250 000 jobs in South Africa supported by the brewery industry. He said that the global average in the sector was one in 110 jobs.
“We would obviously love South Africa to be one in 110 because it would mean more people in the country have jobs. But the reality is, with the economy where it is and employment where it is, beer is over-indexing in terms of its contribution to jobs in South Africa and has a very important role to play in driving employment,” Rivett-Carnac said.
He added that the alcohol industry in South Africa contributed about R43-billion in tax every year.
“We realise, as an industry, the complete alcohol industry, the importance of us paying significant tax. We appreciate fully that alcohol does create harm if not consumed responsibly. We understand that excise taxes are a very important part of the fiscus, and our contribution to those is something we take seriously and understand that needs to happen.
“However, policy certainty for us as an industry as we move forward in what is a very tough time for us as an industry is important. And the benefit of having consistent policy implementation results in a growing industry,” he said.
Rivett-Carnac noted that SAB announced at the last two investment conferences investments of almost R12-billion into South Africa, which he said was off the back of two almost inflationary increases in excise taxes.
“This was a fairly stable policy environment for us to operate in, which gave us the confidence to operate. It allowed the industry to grow over the last few years. And with growth comes requirements for more capacity,” he said.
Rivett-Carnac explained that, to expand a brewery, SAB needed more farmers to grow more barley, maize and more hops. More transporters would be needed, as would the people who work directly in the brewery, as well as more retailers to sell the products.
“The knock-on impact of a growing SAB has a significant impact on jobs in the country. And this is something we take very seriously. We need to grow, but we also need to grow responsibly, while reducing alcohol harm,” he said.
Rivett-Carnac emphasised that SAB’s position did not entail advocating for the elimination of excise taxes entirely. He pointed out the operational challenges caused by the uncertainty surrounding excise tax increases, as the industry had historically faced unexpected double CPI hikes on certain occasions. This would require SAB to temporarily halt brewery operations and undertake a comprehensive recalibration of their systems to adjust for the new costs.
“You need a clear break, because you’re paying one excise right up to the Budget Speech. And immediately from the next day, you need to pay a new excise rate,” he said.
Rivett-Carnac said it was SAB’s wish that Treasury provide certainty over a three-year period that was in keeping with expected inflation rates, rather than unpredictable and sudden changes on a yearly basis