Sun | Dec 8, 2019

Red Stripe tees up pitch for another tax break - New boss wants to ‘level up’ production, local inputs

Published:Friday | November 22, 2019 | 12:24 AMHuntley Medley - Senior Business Writer
Managing Director of Red Stripe Jamaica, Luis Prata.
Managing Director of Red Stripe Jamaica, Luis Prata.
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Luis Prata has a reputation as a turnaround manager. But that is not his mission in Jamaica.

The new managing director of Desnoes & Geddes Limited, which trades as Red Stripe Jamaica, has joined a company that is already seen as well run.

So Prata’s goal is to dramatically scale up production, sales and profits, and slash operating costs. And, like others before him, he is looking to the Jamaican Government to cut the company a break.

The pitch that Red Stripe is teeing up surrounds its estimations of the brewery’s cumulative value-added contribution to the Jamaican economy in revenues along the value chain, salaries and taxes, which Prata said totalled $21 billion last year, or roughly one per cent of Jamaica’s GDP.

Red Stripe, which was taken over by Dutch beermaker Heineken four years ago, says it generated $5 billion in margins for its trade partners locally, and created 446 direct jobs and 6,700 indirect ones, which it says is 0.5 per cent of the national workforce.

The bulk of that calculated value chain impact, the company says, goes towards government taxes, which amounted to $7 billion in 2014 and $11 billion in 2018.

It’s not the first time the maker of Jamaica’s iconic beer brand is batting for a tax break. In 2001, the company lobbied for and received a five-year deferment of income tax that saw the Government Treasury giving up $2 billion as an incentive for the beer and drinks maker to invest $1.5 billion in upgrading its factory. In 2017, company officials also called for tax incentives to offset a $5.2-billion investment in green initiatives, including switching its fuel source to LNG.

In the past, the company also clamoured for the equal application of special consumption tax on beer and rum – a call which was heeded by the Government in 2010.

The new Red Stripe boss, who replaced Ricardo Nuncio in August, has tied the value chain benefit analysis to the case he is making for sought-after tax incentives to boost local inputs, such as cassava, and scale up production, but Prata declined to disclose his growth targets.

“In the end, it about selling more and growing the business inside and outside Jamaica,” Prata told the Financial Gleaner in an interview last week. Red Stripe, with a new board chairman in Peter Melhado since July, when former Chairman Richard Byles resigned to become Bank of Jamaica governor, had a revenue turnover of $23.7 billion last year and made a profit of $3 billion.

“The challenge we have is to keep this trend positive and increase our socio-economic footprint in Jamaica,” says the new company chief, a Portuguese who arrived in Kingston this summer with his wife Sara and two sons.

“Here the business is on a positive trajectory. My goal is to level up the organisation,” he said.

To achieve this, Prata says the company will have to increase the use of local raw materials.

“The risk is that we end up importing everything. To be economically sustainable we have to have good options available in Jamaica. Cassava would be a very good example, but it is not necessarily competitive from a cost point of view.”

Cassava cultivation

Four years ago, Red Stripe replaced imported barley with cassava to produce the natural sugars needed for its beer production. Under its Project Grow, the company has more than 2,000 acres under cassava cultivation in St Catherine and buys additional amounts of the tuber from contract farmers, who plant another 1,000 acres of the crop.

A total of more than 1,100 tonnes of the cassava is produced for beer-making each year, with the bulk of that coming from the company’s high-tech farm. But Prata says this output is inadequate to meet the needs of the mega-sized production jump Red Stripe needs across various product lines.

Discussions around a partnership with food and consumer goods manufacturer and distributor Seprod are under way. The aim is to significantly expand cassava production on Seprod’s former sugar cane land for use by the brewery, and for Seprod to create a cassava flour for local and export sale.

Red Stripe officials would only say talks were progressing on this plan to determine the approach and the business case.

“If the Government sees the potential of boosting the usage of local raw materials, and I’m sure they do, then they should give incentives to the economic agents,” said Prata.

“It would not be absurd to have some tax incentives for the usage of cassava or other local raw materials you need to get to cost competitiveness so you create the conditions for the scale to happen,” he said.

Red Stripe is pressing its case for a tax break under the umbrella of the Jamaica Manufacturers’ and Exporters’ Association, a body currently headed by Seprod CEO Richard Pandohie. Prata also says the company has engaged the Government on the desire to achieve greater local input in its operations.

Meantime, he is also looking to automation, staff training, and trimming the tax obligation, among other initiatives, as ways to boost efficiency at the brewery.

Prata is committing to keeping current capex investment levels of $10 billion every three years to keep up the plant. Immediate projects to be tackled include new cellars for the brewery, and improvements to the water-treatment plant and the carbon plant.

The new MD also wants to shave the $3.8 billion his company spent on raw materials and packaging in 2018 by sourcing glass bottles locally, if such an operation were restarted here.

The brewery has been importing glass bottles since West Indies Glass went out of business nearly 20 years ago after reportedly failing to get government concessions to retool and modernise. Red Stripe now buys its bottles from glassmaker Vical in Costa Rica.

The Government is said to be mulling incentives to woo investors into the glassmaking business as part of the Special Economic Zone buildout.

Red Stripe has no interest in operating a bottle-making plant, but is examining the cost-effectiveness of sourcing its bottles from glassmakers within Heineken’s global network.

Production costs too high

The company’s production costs are said to be too high to allow its products to compete on price with its many global competitors, so overseas, it is forced to play in the premium price category.

“In some of the markets we are now selling, we are not giving them a good deal,” the Red Stripe head said.

The competitiveness gap which Prata has identified at Red Stripe also extends to labour and impinges on the company’s ability to grow exports.

“I think we are improving on labour productivity but there is still some way to go. We are still below the benchmarks. In one of our (two production) lines we are quite competitive,” he said.

Red Stripe will be rolling out additional beer flavours to complement the popular lemon, sorrel and the new watermelon. And, while the regulations now only allow for medical marijuana products, the brewery is alert to the prospect that at some point the market may allow for a cannabis-infused beer.

“We are observing. It’s an interesting development which can have impact on our space, so we are attentive. The more you read about it, the more you sense that there is something there,” Prata says.

In addition to beer, D&G white rum, Smirnoff and Ciroc vodka, Johnnie Walker whiskey and Baileys Irish cream.

huntley.medley@gleanerjm.com