NB’s profit margins remain squeezed as competition dampens sales

Nigerian Breweries (NB) Plc’s ebbing profit margins are cause for concern as the firm is unable to curtail rising production costs while intense competition and weak consumer spending has dampened sales volume.

For the year ended December 2017, NB’s operating profit margin–or the share remaining after paying to make its product–reduced by 37.52 basis point to 16.57 percent from 26.42 percent as at December 2016.

The Nigerian brewer’s margins was hard hit by a single digit growth at the top lines (sales) and rising cost of production brought on by higher energy and material costs.

There could be gross margin contraction for brewers in Africa’s largest economy as analysts remain bullish on the price of barley.

Global barley production is projected to contract by 3.7 percent YoY to 141.7MT in 2018, hinged on decline in production from Australia, Canada, and US, based on United State Department for Agriculture (USDA) estimate.

“For the 2017/2018 season, despite expectation of lower demand, production, which is expected to fall faster than demand, translates to a wider deficit in the barley market,” said analysts at ARM Securities Limited.

Nigerian Breweries or NB’s total operating cost ratio increased to 84.09 percent in December 2017 as against 83.39 percent as at December 2016. This means the firm is spending more on operating expenses to produce each unit of product.

While NB’s price hike across key products in the third quarter of last year resulted in a 9.80 percent growth in sales as of December 2017, weak consumer spending and stiff competition from producers of cheaper brand deal a great blow on sales volume.

NB’s parent company Heineken points to 4-6 percent decrease in volumes.

While consumer inflation rate in the country has reduced for a 12 straight month to 15.10 percent for the month of January, it is far outside the central bank’s band range of 6 percent and 9 percent.

This means consumer purchasing power remains eroded as an increase in gasoline price leaves them with little money in their pocket to buy liquor.

NB should brace for a beer war as Anheuser-Busch InBev NV, (AB InBev) is seeking to consolidate its three businesses into one listed entity on the Nigerian Stock Exchange (NSE).

AB Inbev’s, the largest brewer in the world, has a well-diversified portfolio that makes it easy for the brewer to consolidate its position in the market post-merger, BusinessDay market analysis show.

For instance, Trophy Larger Beer, produced by SAB Miller, is a premium brand in the South West while Hero, produced by Intafact, is increasingly making inroads in the South East.

Nigerian Breweries’ shares closed at N131 as of 2:00 pm in Lagos, valuing it at N1.04 trillion.

 

BALA AUGIE