Ratio Magazine :: The Inside Track to East Africa’s Economies - Kenya: Does the End of Safaricom's Jibambie Promotion Indicate Pause in Price Wars?

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Kenya: Does the End of Safaricom's Jibambie Promotion Indicate Pause in Price Wars?

Friday, 06 February 2009

Robert Bunyi comments on the end of Safaricom’s Jibambie promotion and analyses what this means for the market and the company’s outlook.

Sometime mid last year, top level management at Zain changed and we started to see a more aggressive push by the company for market share. The Vuka tariff, still runing today, offers a single calling rate of Ksh.8.00 per minute across all networks and at the time of its launch became the lowest available in the market. Uncharacteristic of Safaricom, it took its time to respond but nevertheless launched the Jibambie promotion which offered on net calling rates of as low as KES3.00 per minute depending on the denomination of the scratch card used to load airtime.

Given Safaricom’s larger marketing budget, the Jibambie promotion quickly began to dominate the media and gained parity with Vuka if not a slight advantage. Safaricom’s campaign message was that the Jibambie promotion was a limited time offer which subsequently ended on 31 January. The two campaigns and the launch of the Orange and Yu services triggered negative sentiment on an already beaten down Safaricom stock. The lower prices did not help matters much as fears of a value destructive price war became entrenched amongst investors.

The coming to an end of the Jiambie promotion in my view speaks volumes about the industry that investors should note. For instance we can now reasonably conclude that the lowest level per minute charges can fall to earn a fair return in Kenya today seems to be around Ksh.8.00 per minute for across network calls. All the operators now have their call charges more or less around this level. This is important to note because it implies an intensification of the price wars is unlikely for now. Operators will now have to focus on the quality of their services and amplify levers of differentiation.

It would also seem that for on net calls the lowest that operators can go to is about KES3.00 per minute and since Safaricom has set its main tariff back to KES8.00 per minute, it has an opportunity to expand margins. In my view, Safaricom’s dominant position remains strong allowing it to earn significant, healthy profits in the industry. This point is important to consider in the context of a tighter global credit environment where all operators would be struggling to some extent to secure credit to fund network expansion. Safaricom’s market position with its healthy cash flows will afford it the capacity to continue with its capital expansion plans and maintain a significant budget in marketing investment.

Finally Kenya is currently in an economic slowdown that began on the back of local factors and could be deepened by global factors in the months ahead. As a consequence, consumer spending in Kenya should be depressed in 2009 before a pick up comes through in late 2009. Safaricom’s revenue growth for 2009 should be weaker than expected and investor should expect weaker earnings growth for year end March 2009. However, investors focus should be on the period beyond 2009 and should also note that the share has already fallen back as much as 60% from its recent highs.

Safaricom’s strong brand, current strong cash flows relative to peers and an outlook for an improving economy supporting consumer spend should all underpin a strong share price performance over the next 12 months.

About the Author

Robert Bunyi has worked for Equity Stockbrokers, Liquid Africa, Standard Bank of South Africa, Standard Investment Bank, and Renaissance Capital Kenya before setting up Mavuno Financial in June 2008. Robert can be reached on This e-mail address is being protected from spam bots, you need JavaScript enabled to view it for more information and advice on Kenya’s stock market.

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