The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Commonwealth Brewery has pledged to avoid “severe price disruption” to its Bahamian manufacturing and import operations from Value-Added TAX (VAT), its managing director warning that the reform needed “careful management”.

Writing in the 2012 annual report for the vertically-integrated brewer and liquor wholesaler/retailer, Nico Pinotsis said: “The announced introduction of a Value-Added Tax by government in 2014 will require careful management if severe price disruption to our domestically manufactured, as well as our imported products, is to be avoided.”

He pledged that the BISX-listed company, which is 75 per cent majority owned by international brewing giant, Heineken BV, would work closely with the Government to minimise VAT’s impact on its operations.

Mr Pinotsis’s comments again highlight the concerns many Bahamian manufacturers have over VAT’s implementation come July 1, 2014. Key concerns include the cash flow and pricing impact, the record keeping and accounting burden that may be placed on many businesses, and whether the tax will raise the cost of living and cost of doing business in the Bahamas.

As a vertically integrated company, Commonwealth Brewery’s various operational arms - the 150,000 square foot brewery, its wholesale business and Burns House retail operation - will effectively be levying VAT on each other, and claiming back input costs.

Hence Mr Pinotsis’s concerns about tax reform leading to price increases at all levels of Commonwealth Brewery’s production chain (VAT is a tax on the value added at each stage of the supply chain) and for end consumers.

However, the BISX-listed company should fare better than most in adapting to VAT, as it will be able to draw upon the resources and expertise of its majority shareholder, Heineken. The international giant already operates in numerous countries that levy a VAT.

Elsewhere, while not referring to Jimmy Sands’ Bahamian Brewery and Beverage Company by name, Mr Pinotsis acknowledged that Commonwealth Brewery faced “a potentially tougher competitive environment down the road that will need to be addressed”.

“We will have to step up efforts to defend our leading position as supplier of choice,” he added. “As stated last year, that means we need to continue to earn brand preference among consumers by satisfying existing customers, wholesale and retail, and by winning new customers.”

At year-end 2012, Commonwealth Brewery had committed $361,763 in capital resources to the upgrade of key liquor stores, such as the Harbour Bay Shopping Centre location. Mr Pinotsis said more such projects were in the pipeline.

Focusing on the sustainability of its operations, Commonwealth Brewery said “improvements on packaging line efficiencies and the introduction of an energy-saving team in the cellars area” reduced the company’s 2012 electricity consumption by 11.2 per cent.

This fell from 22.4 kilowatts per hour (kWh) in 2011 to 19.9 kWh last year, beating the company’s own internal target of 22.1 kWh. Water consumption, too, was down from 6.3 ht/ per hectolitre (hl) in 2011 to 5.9 ht/hl, beating the 6.2 ht/hl target.

Thermal energy consumption at Commonwealth Brewery also decreased, from 182 MJ/hl to 163 MJ/hl year-over-year, a 10.4 per cent decrease that came inside the 177 MJ/hl goal for 2012.

The company attributed this to “installing a smart brewing system in the brew house, temperature optimisation on bottle washers and improvements on packaging efficiencies”.

Commonwealth Brewery’s bottle recycling rate increased by 12 per cent in 2012, while its non-recycled industrial waste production fell from 4.95 kilograms per hectolitre in 2011 to just 4.32.

It added that carbon dioxide emissions from the Clifton Pier brewery dropped from 21.7 kilograms of carbon dioxide per hectolitre to 18.1 in 2012.

Mr Pinotsis, meanwhile, said Commonwealth Brewery’s operating expenses as a percentage of revenues fell from 86 per cent in 2011 to 84 per cent last year, as the top-line growth outstripped cost increases.

Some $22.3 million net cash was generated from Commonwealth Brewery’s operations prior to working capital changes. Around $2.4 million was used for investments.

The annual report also disclosed that the company’s ‘out of pocket’ information technology (IT) expenses increased by $0.3 million year-over-year, as it moved to improve infrastructure connectivity between head office and the retail stores.

IT service charges paid to Heineken also rose, as Commonwealth Brewery moved to its majority shareholder’s global network services as opposed to sourcing from third party vendors.