High operational costs choke bread makers

The confectionary sector has been growing rapidly over the years, but this has not been without challenges. In fact today, the sector is grappling with high operational costs and taxes. Business Times’ Peterson Tumwebaze spoke with  Augustine Shema, the chairman of Bread Manufacturers Association about these problems and what industry players are doing to overcome them.
A worker packing bread at a store in town. The prices of bread are bound to rise as bakers try to cover operations costs. The New Times / Peterson Tumwebaze
A worker packing bread at a store in town. The prices of bread are bound to rise as bakers try to cover operations costs. The New Times / Peterson Tumwebaze

The confectionary sector has been growing rapidly over the years, but this has not been without challenges. In fact today, the sector is grappling with high operational costs and taxes. Business TimesPeterson Tumwebaze spoke with  Augustine Shema, the chairman of Bread Manufacturers Association about these problems and what industry players are doing to overcome them.

if you do not find your favourite bread on supermarket shelves this evening, do not be surprised; the producer could have failed to raise money to buy raw materials. And when it does make it to shelves, the bread might be at a higher price than you usually buy it, thanks to the high cost of many of the factors of production.

According to Augustine Shema, the chairman Bread Manufacturers Association (BMA), the high costs of production is choking the industry.

“The prices of raw materials, such as wheat, which is a major ingredient in bread baking, are too high. You cannot make profits when you are spending Rwf15,000 for every 25kg of wheat… Remember, this is besides costs like water and workers’ salaries,” Shema told Business Times in an exclusive interview over the weekend. He also noted that because of high power tariffs, most of the bakers have resorted to using firewood. “This compromises quality, which in the end hurts our market,” he said.

He added that dependence on wood fuel could eventually hurt the environment as thousands of trees are felled to fill the power gap, especially as the number of bread makers is increasing.      Shema noted that consumers will have to bear the brunt of these problems in form of high bread prices in the near future.

According Mike Fietzek, the managing director of La-Galette Bread Industry, high power tariffs is one of the major factors hiking the cost of producing bread.

Fietzek, who said he spends between Rwf6m and Rw7m on power alone per month, pointed out that if no solution is found, many local bakers could close shop in the near future.

“Power charges are too high for producers… Unstable electricity supply has also compounded the problem, which is hurting us greatly since we are dealing with perishable products,” Mike said.

However, EWSA encouraged the bakers to work at night to benefit from low power fees.

Felix Gatanazi, the communications officer at Energy, Water and Sanitation Authority (EWSA), said the bakers could cut power expenses if they used ‘the time of use tariff plan’ that targets industrialists.

“That’s why we introduced this package, which allows industrialists, bread bakers inclusive, to choose to operate from 11:00pm to 7:00am, where they pay Rwf96 per unit compared to Rwf126 charged during the day. Therefore, we encourage them to operate at night when tariffs are low,” Gatanazi said. Domestic consumers pay Rwf134 per unit any time of day. All the charges, for both the industrialists and domestic consumers, are VAT exclusive.

The bakers said some raw materials, especially yeast, are imported from outside the region and, therefore, have no import duty waiver. 

Although wheat production increased from 67,868 tonnes to 130,938 tonnes in 2011 and about 159,767 tonnes in 2012, prices of wheat has increased from Rwf600 per kilogramme to Rwf650 a kilo in the past few months. This has caused further uncertainty among bread manufacturers.

However, experts at the Rwanda Agricultural Board said the rise in wheat prices is occasioned by the increasing demand for the cereal.

“People think that whenever prices of a commodity go up, it’s always due to low production. That’s not the case because, sometimes, this is due to high demand as is the case for wheat in Rwanda today. However, we are doing all possible to ensure that production increases further in the coming seasons to ease demand pressures,” Jean de Dieu Dushimimana, the extension and mobilisation officer at Rwanda Agricultural Board, said.

There are presently 280 bread makers in Rwanda, up from 35 bakers in 2001. They produce over 11 million loaves of bread (of varying sizes) daily, BMA chief said.

The bakers’ boss also pointed out that value added tax (VAT) payment is affecting the sector, especially with the local raw material suppliers who do not issue receipts. As a result, bread makers opt for imported raw materials, which affects their business cycles, besides being expensive.

The bakers are supposed to use the receipts to file their VAT returns with the Rwanda Revenue Authority.

“Our main suppliers, Azam and Pembe, are doing us a disservice when they ignore such simple, yet very important things like issuing receipts. This has forced many producers to stop using local raw materials,” Shema explained.

However, Richard Tushabe, the Rwanda Revenue Authority deputy commissioner general, said for a product to qualify for preferential tax treatment, it must fulfill the criteria of value addition. He the yeast imported from Kenya was being taxed because the manufacturer has not yet fulfilled the above requirement.

Tushabe, who is also the commissioner for domestic taxes, said the revenue body was not taxing packaging materials to support manufacturers. Under this scheme, raw materials are not taxed; semi-processed goods have a 10 per cent tax waiver, while a 25 per cent tax waiver is for finished products.

He advised tax defaulter to pay up before they are apprehended and penalised. Defaulters face a 50 per cent to 100 per cent, depending on the nature of transaction.

The bakers said they would soon increase the cost of bread and other confectionary products to offset some of the expenses.

“We don’t want to hurt customers because we know that when the wholesale price is high, the retail price will rise too. This affects demand for our products negatively, hurting our earnings,” Eric Mugabo, the managing director of Oven Bakery, said.

According to the recently released consumer price index figures, bread consumption rose from 111 indices in 2012 to 116.8 indices in March 2013, making the commodity one of those with the highest demand when compared to other foods and beverages.

To produce quality bread from every 50 kilogrammes of wheat flour, one needs 6kg of sugar, 2kg of cooking fat, 500 grammes of yeast, 100 grammes of salt and another 100 grammes of improvers.

“This is the reason why producing bread is expensive,” Mugabo, who has since closed one of his bread factory branches in Kicukiro to cut operational costs, said.   

Most bakers, who spoke to us on condition of anonymity, said the cost of packaging is also very high. “The government should help us find an alternative packaging material.”     

Fietzek noted that if a certain gauge of polythene paper was allowed into the country, his packing expenses would drop from Rwf7m per month to about Rwf1.5m per month. “This would enable us reduce the price of bread and make some profits,” he explained.

 

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