24 October 2017

East Africa: Makers of Top Paint Brands Ready for Price War

It is a battle of paint makers as Akzo Nobel and Sadolin go at each other through franchise fees, distributorship and advertising as the duo seek to control the East African market.

Previous negotiations pursued by Akzo Nobel, a Dutch-controlled global paint maker and Sadolin, a regional paint producer with subsidiaries in Uganda, Kenya, Tanzania and Rwanda over revised franchise fees charged by Sadolin broke down several months ago, paving the way for an acquisition deal recently concluded by Kansai Plascon, a Japanese-owned global paint company.

Under a franchise agreement, a trademark and patent owner enters into a contract with another party that allows the latter to produce and sell a specific product in a selected area.

The franchisee is charged a commission every year until the contract is terminated.

Commission charges levied through franchise agreements are usually represented by a percentage fee calculated against the annual sales income or profit before tax and are common in the beverages and pharmaceutical industries.

The Akzo Nobel-Sadolin franchise agreement signed in 2002 provided for use of trade name, product technology and marketing support and initially bore a commission fee of one per cent tied to a five-year duration.

However, Akzo Nobel raised the commission fee to two per cent in 2014 for the period from May 1, 2015 to December 31, 2019.

Fresh negotiations relating to this agreement were scheduled for 2019 but the Dutch company's intention to increase the fee to five per cent apparently upset Sadolin. The new fee, if accepted, was to take effect in January 2020.

Whereas Sadolin argued that the five per cent fee was expensive under prevailing market conditions and it preferred the existing two per cent, Akzo Nobel put its foot down and insisted on a higher price for the franchise.

This standoff forced Sadolin's owners to discontinue the Akzo Nobel partnership and seek new partners. Subsequently, Kansai Plascon acquired majority shares in Sadolin (EA) for $100 million in August, but sparked a bitter market dispute over use of Akzo Nobel's franchise.

Local paint dealers seem to be the beneficiaries as the manufacturers relax terms offered to distributors with longer payment periods tied to stock orders, which eases pressure on distributors' cashflows and cut down on expensive, short term borrowing facilities.

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