By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Commonwealth Brewery has absorbed a "significant" cost by choosing to "eat" the 4.5 percentage point value-added tax (VAT) hike across its entire Kalik beer product line.

Dennis Hanna, the BISX-listed brewer's vice-president of corporate affairs, confirmed to Tribune Business that it had elected to absorb the tax increase on its "number one brand" rather than pass it on to Bahamian and foreign consumers.

He said the move was made to maintain Kalik's price competitiveness and as a goodwill gesture to consumers struggling to adjust to the impact of a 12 percent VAT rate introduced with the 2018-2019 budget.

Commonwealth Brewery, which is 25 percent owned by Bahamian shareholders, revealed the decision in unveiling its results for the third quarter and first nine months of 2018.

Management said that while the three months to end-September is typically the slowest month in any calendar year, the 2018 period had "presented more challenges than usual" due to a combination of the VAT hike and a shift in consumer spending towards spirits and "economic" alcoholic drinks brands.

"Due to the seasonality of the business, it is typical of the third quarter to see declines in revenue growth," Commonwealth Brewery's results statement said. "However, this period has presented more challenges than usual.

"As reported in previous quarterly reports, a shift in consumer spending habits gives rise to sales gravitating towards spirits and more economic brands. This, coupled with the impact of a VAT increase of 4.5 percentage points effective July 1, 2018, has limited the spending power of our consumers and resulted in negative revenue growth of 3.5 percent for the quarter."

Commonwealth Brewery, which is 75 percent majority-owned by multinational brewing giant, Heineken, added that the shift in consumer preferences to spirits and lower-priced brands had resulted in its "cost of goods sold" increasing year-over-year "due to higher import costs" compared to its Bahamian-produced beer brands such as Kalik.

"In an effort to remain competitive and assist consumers with rising costs, the company decided to forego the above VAT price increase on its main brand, Kalik," the management analysis confirmed.

Mr Hanna was unable to confirm the additional cost Commonwealth Brewery is absorbing as a result of electing not to pass the VAT increase on to Kalik drinkers, other than to brand it "significant".

"We have the same price before the VAT was increased. We maintained the same price for the Kalik family," he told Tribune Business. "Kalik is our number one brand by far.

"It was a goodwill gesture and we also wanted to remain competitive. We decided to absorb it, Kalik being number one."

Mr Hanna was unable to say whether absorbing the 'output' VAT on all Kalik products will be a long-term strategy for Commonwealth Brewery, or if it is just a short-term measure.

He added that the 2018 third quarter was "not unusually slow", with performance matching the "norm" for a time of year that coincides with the slowest part of the tourism season.

Commonwealth Brewery actually incurred a small $3,574 total comprehensive loss for the 2018 third quarter, with its top-line revenue dropping by more than $1m to $30.044. This was partially offset by a near $3m decline in operating expenses, driven by an almost-$2m fall in raw materials, costs and services costs to $24.185m, while staff costs dropped by some $600,000 to $5.22m.

For the first nine months of 2018, while Commonwealth Brewery's total comprehensive income was down by 56.2 percent year-over-year, standing at $5.361m compared to $12.242m in 2017, the prior year figure was boosted by the $6.3m insurance settlement and expense clearing related to Hurricane Matthew damages from October 2016.

While revenue was ahead 1 percent year-over-year for the first nine months, Commonwealth Brewery's management cautioned: "Continuous changes in consumer spending power, slow economic growth and resultant changes in consumer preferences compels the company to further sharpen its focus on innovation and cost optimisation."