Beer battle foams over as billionaire distributor takes on mighty EABL

A worker checks beer bottles on a conveyor belt at East African Breweries Ltd’s Ruaraka factory. [PHOTO: FILE/ STANDAR D]

NAIROBI: Billionaire Peter Burugu opened his email in June this year to find an unexpected note.

His accountant, Lydia Mwangi, told him East African Breweries Ltd (EABL) had slashed his credit limit to Sh70 million from Sh111 million.

Mr Burugu, a man who has built a multi-billion-shilling beer distribution empire by riding on EABL products for nearly two decades, was already in the process of pleading with the brewer to renew his contract.

“Kindly note that EABL has adjusted Btdl’s [Bia Tosha Distributors Ltd] credit limit down to Kes.70M from Kes.111M,” the email forwarded to Burugu on June 10 reads in part.

This email is now part of court evidence in the ongoing battle between the distributor and the beer maker.

A credit limit defines the value of goods a company can access without having to pay cash.

Burugu’s accountant asked him to request the brewer to increase the credit limit as the firm awaits the release of a title for property on Kampala road that would help them increase their guarantee, documents filed in court show.

Ordinarily, such matters would have been handled by the billionaire’s daughter, Anne-Marie Burugu, who is the managing director of Bia Tosha. Instead, Burugu handled it himself, raising the issue directly with Kenya Breweries Ltd (KBL) Managing Director Jane Karuku.

“I am forwarding the attached email from our account at Bia Tosha Distributors Ltd, which is self-explanatory,” his court submissions show he wrote.

“In view of the fact that EABL holds security of Ksh173 million, I wonder why a decision was made to reduce our credit level with yourselves from Ksh111 million to Ksh70 million. Could you be kind enough to look into this, with a view to giving authority for our credit facility to be pegged on the value of the security held by EABL?” 

But in its reply, EABL said Bia Tosha’s credit limit was actually Sh70 million.

“Your client’s current credit limit with our client is Kshs. 70 million. While only Kshs. 50 million is secured by way of guarantee. In line with its practice prior to the filing of the petition, our client has continued to provide your client with the benefit of an additional Kshs. 20 million of discretionary unsecured credit,” EABL’s lawyers wrote.

“Your client is required to pay cash in order to clear any orders above Kshs. 70 million and adequately service the market.”

Lucrative business

But it was the decision to redistribute 22 of Bia Tosha’s routes after the expiry of the firm’s contract that has led to what is now shaping up to be the second-fiercest beer distribution war in the country.

Burugu’s entry into the ruthlessly protected distribution industry came in the 1990s, when SABMiller strutted into town from South Africa, hoping to make inroads in the country with its flagship brand, Castle.

At the time, the late Njenga Karume, an early trendsetter in the industry, was one of EABL’s biggest distributors. He, however, began flirting with the South African firm, risking his lucrative beer distribution business with EABL.

Having picked Castle’s side in Kenya’s fiercest beer war of the 1990s, he created an opportunity in the market he had abandoned.

Burugu, now 70, was keenly watching the fight unfold from a vantage position. He was still an employee at EABL and had developed an understanding of the market.

He saw an opportunity and took it.

Burugu opted for an early retirement plan, and left the brewer in 1993 – he had risen from an accounts trainee to being in charge of the distribution and logistics department.

With the blessings of EABL, Burugu set up Bia Tosha, which offered his former employer, which was at the time desperate for a comeback, a way out of the Karume issue.

To cap his good fortune, EABL granted Burugu a supply of beer and spirits on credit, giving him the headroom to build up his financial muscle and setting him on the path to becoming a billionaire.

The icing on the cake came when EABL’s major distributor in the Nairobi West region folded. Burugu bid for the job and secured it. His risky gamble paid off.

The businessman handles nearly a 10th of all the beer that leave EABL’s Ruaraka factory, and is one of the biggest beer distributors in the country, alongside Rwathia, Kamahuha, Veew and Ishano distributors.

Burugu’s beer distribution empire raked in more than Sh5 billion in sales last year, beating several of the companies listed on the Nairobi Securities Exchange (NSE). Bia Tosha is estimated to have earned a gross profit of Sh800 million from these sales.

Burugu’s rise has made him the envy of many in the lucrative sector, which has earned him friends and foes.

But his main supplier was the last person the man who supplies as many as 2.4 million cases of beer – about 6,700 cases a day – and 20,000 cases of assorted spirits in a year was expected to face off with.

Burugu’s fortunes started to tumble last month after his company allegedly signed a similar contract with EABL’s main competitor in Kenya, Keroche Breweries.

In court filings, EABL argues Bia Tosha significantly reduced its orders after signing the new contract. As a result, the distributor failed to adequately service the routes allocated to it, leading to stock shortages.

“It is now common knowledge your client had entered into a distribution agreement or arrangement with the competitor, under which your client will be distributing the competitor’s products on the same routes that your client has been distributing our client’s products,” a letter from EABL to Bia Tosha reads in part. The letter has been filed in court as part of the evidence in the case.

Distribution agreements

The billionaire, who is putting up a Sh500 million mall in Kiambu town with Nakumatt as an anchor tenant, now finds himself walking the same path the late Karume navigated in the early 1990s.

According to court papers and annexes filed by the two companies, EABL argues that it has entered into four non-exclusive distribution agreements since 2006. In its latest defence filed last week, the beer manufacturer says it has never terminated any of Burugu’s licences as alleged.

The first agreement was signed on October 13, 2006. The second was signed three years later, and the third in October 2012.

But it is the fourth contract that has led to the court battle between the distributor and the brewer.

In April, Bia Tosha is said to have refused to sign a new agreement, raising various issues EABL says the parties held several negotiations and agreed on all issues except Bia Tosha’s “extortionist” demand to increase its remuneration by 225 per cent.

The beer maker says it rejected the proposal on the grounds that it would have adversely affected consumer prices.

“The petitioner declined to sign a new agreement, and the third agreement ultimately expired on 31st May 2016 after three extensions,” EABL says in its filed replying statement.

The brewer added that Bia Tosha did not apply for an extension of the contract to the court or to itself.

EABL assumed that Bia Tosha was no longer interested in the business after the time elapsed and appointed other distributors to replace it.

On June 3, Burugu called the brewer to a meeting to discuss the contract.

“I attended this meeting at Muthaiga Country Club together with the respondent’s managing director, Mrs Jane Karuku,” EABL’s legal director, Nadida Rowlands, says in his replying affidavit.

Mr Rowlands says that during this meeting, Burugu pleaded to be reinstated as a distributor.

“As I had indicated, indeed pleaded during our meeting, the ideal situation would be that we be allowed to continue serving our sales area as it was due to the huge investments we have made in terms of equipment and personnel. I trust you will be giving this request due reconsideration,” Burugu wrote in an email annexed to the statement.

On its part, EABL says that during the meeting, Burugu was ready to sign a fresh contract.

“He informed us that he was not aware of the stalemate in the negotiations and he was willing to sign a contract on the existing terms,” Rowlands says.

During the meeting, it is alleged that EABL tentatively agreed to reinstate Burugu “on the assumption that this was a genuine plea”.

“Therefore, the parties proceeded to sign an interim 60-day agreement to give the parties time to have a strategic business conversation on the future of their relationship,” Rowlands says in the court papers.

“Consequently, the parties executed the fourth agreement, which was dated 3rd June 2016.”

Goodwill refund

Ten days later, Burugu went to court to stop the beer maker from cancelling this contract.

EABL says the new agreement was not exclusive, and under the terms, it was at liberty to appoint other distributors over the same areas allocated to Bia Tosha.

EABL appointed six other distributors on Bia Tosha’s route. The brewer added that it had allocated Burugu seven routes on a non-exclusive basis, including Nairobi’s Hurlingham, Industrial Area, Kenyatta, Lang’ata, Nairobi West, South B and Upper Hill.

Bia Tosha wants the court to prevent EABL from appointing other distributors, and refund a cumulative Sh38 million in goodwill paid over the last 10 years for exclusive distribution rights, a demand EABL has opposed.

The refund of the Sh38 million goodwill has further been made contentious by the fact that British alcoholic manufacturer Diageo, which owns a controlling stake in EABL and has been enjoined to the suit as an interested party, prohibits the payment of goodwill on ethical grounds.

Bia Tosha claims that EABL had threatened to terminate its distribution contracts for 22 routes.

EABL won the second round of the court battle at the Court of Appeal after the court ordered that the status quo remains as at Thursday, August 11, 2016.

According to EABL, this in effect means that the orders given by the High Court’s Justice Joseph Onguto on June 29 giving Bia Tosha exclusivity over 22 routes have been set aside. It also allows KBL to appoint other distributors to serve these 22 routes.

But this interpretation has been disputed by the distributor, which moved to court and filed for contempt of court charges against the beer maker. Bia Tosha says EABL went against a court order to terminate its contract on August 5 this year with the intention of “crippling its business”.

Bia Tosha wants the court to find EABL in contempt, and is seeking a Sh30 million fine and wants the firm’s managing director and sales director committed to civil jail for six months.

“That the honourable court issued an order on 16th June, 2016, where it preserved the petitioner’s exclusive distributorship territories as at 2nd February 2006, pending the hearing and determination of the petition,” the firm says in its petition.

Bia Tosha adds that EABL has refused to supply it with products, which, it argues, amounts to compromising its position.

“The petitioner’s employees numbering over 200 will effectively, but illegally, be rendered redundant as there is no work for them and there is no business turnover that will guarantee the payment of their salaries and benefits,” the petition, signed by Kenneth Kiplagat, reads in part.

EABL, however, has contested orders that temporarily stopped it from appointing another supplier to replace Bia Tosha.

Wrong in law

In its appeal, EABL says the High Court erred when it declined to consider that there were other contracts with third parties that would be affected if the contract remains operational.

The brewer adds in its court documents that Justice Onguto failed to consider that the case between itself and Bia Tosha was of a commercial nature and not about constitutional rights.

“The ruling appealed from, to the extent set herein, is unreasonable, wrong in law and under any known constitutional principles,” EABL says.

It continued: “The ruling and the orders appealed from are contra statute and have the effect of creating an exclusive status that is expressly prohibited by the Competition Act.”

The order by Onguto, the beer maker adds, has in effect extended the contract between it and Bia Tosha beyond their initial agreement.

Bia Tosha further claims that EABL’s parent company, Diageo, has been threatening local distributors to coerce them into shunning rival manufacturers as part of a scheme to defeat anti-monopoly laws enacted in 2011.

“I personally received many intimidatory electronic messages all calculated at bludgeoning me into submission. Some of these electronic messages were highly offensive. A Diageo senior representative in Cameroon was deputed by Diageo London to intimidate local distributors and he proceeded to issue various threats,” Ms Burugu says in her statement in court.

Besides the lucrative distributorship, EABL and Burugu have other business dealings. The beer maker sold Burugu a nine-acre piece of land at Allsops on the Thika-Nairobi Highway, and the entrepreneur recently partnered with EABL to open Berries and Barrels, a high-end liquor store at Nairobi’s Yaya Centre as part of its diversification strategy.

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