• Sunday, March 03, 2024
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Brewers incur N89bn loss as borrowing costs surge

Brewers face tough times as Nigerian economy sways

Three of the major brewers in Nigeria posted losses in the first half of this year as their borrowing costs swelled on the back of rising interest rates and naira devaluation, a BusinessDay analysis of data from their financial statements shows.

Out of the four beer makers listed on the Nigerian Exchange Group, three swung to loss while one saw a sharp decline in its profit.

Nigerian Breweries Plc, International Breweries Plc, and Guinness Nigeria Plc suffered a combined loss of N89.4 billion in H1 2023, compared to a profit of N34.7 billion in the same period of last year.

Champion Breweries reported a significant decline in profit by 3,600.1 percent to N29.1 million.

Analysts say the large devaluation of the naira following the floating of the currency in mid-June coupled with rising interest rates led to increased operating costs for multinationals whose major costs including finance costs are denominated in foreign currencies.

The Central Bank of Nigeria (CBN) increased the monetary policy rate, also known as its benchmark interest rate, for the eighth consecutive time in July by 25 basis points to 18.75 percent.

“Some brewers are making losses majorly because of the impact of the foreign exchange reform on their finance costs. When finance cost jumps significantly, it can erode all the significant profit companies make such that in terms of net profits, they are making losses,” Omobola Adu, an economist at BancTrust & Co, said.

He said the companies’ performance speaks to the pressures that consumer goods firms are facing. “They are dealing with different macro factors that are impacting their topline performance.”

Financing costs, also known as the cost of finances, are costs, interests, and other charges involved in the borrowing of money to build or purchase assets.

Read also:Nigerian Breweries’ H1 performance in eight metrics

Further analysis of the companies’ financial statements show that Guinness Nigeria recorded the biggest increase in finance cost of 2,402.3 percent to N53.3 billion from N2.13 billion. Nigerian Breweries saw its finance cost jump by 262.5 percent to N11.2 billion from N3.09 billion.

The finance cost of International Breweries rose by 128.4 percent to N13.17 billion from N5.78 billion.

Champion Breweries had the least increase of 12.9 percent in finance cost to N40.4 billion. Its revenue however declined by 15.2 percent to N5.71 billion, while the three others reported a marginal rise in revenues.

“The brewers’ expenses are mostly from unrealised FX losses. They had FX obligations prior to the devaluation, and the devaluation worsened their loss position,” Israel Odubola, a Lagos-based research economist, said.

He added that the decline in profit for Champions Breweries was caused by a drop in revenue amid a rise in operating expenses.

Read also:Nigerian brewers face profit cuts on excise duties, naira devaluation

“Additionally, increased operating expenses, particularly from selling and distribution, also weighed on their operating profit,” he said.

On June 14, 2023, the CBN merged all segments of the foreign exchange market into the Investors and Exporters window, and reintroduced the ‘willing buyer, willing seller’ model. The naira has continued to depreciate against the dollar and other major foreign currencies since then.

“The second quarter was significantly impacted by various factors including the effect of fuel subsidy removal on consumers, naira devaluation and its effect on input cost, and mostly the revaluation of foreign exchange obligations,” Uaboi Agbebaku, secretary at Nigerian Breweries, said in a note in July.

“Together with the cash crunch which materially impacted the 1st quarter, the company’s net loss escalated in H1,” he added.

According to Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, FX exposure of some fast-moving consumer goods firms is high because they import a lot of raw materials.

“The economy is quite tight now, so people who are struggling to feed won’t take alcohol which is affecting the beer makers coupled with the tense competition in the alcoholic industry,” he said.

Data from AsokoInsight shows that beer is the most widely consumed alcoholic beverage with a 55 percent market share, followed by spirits (30 percent) and wine (15 percent).

But top players in the alcoholic industry such as Nigerian Breweries, International Breweries and Guinness Nigeria have been struggling since 2019 following the increment in excise duties in a challenging operating environment.

Between 2019 and 2021, they increased prices more than twice in response to the high excise duties.

Manufacturers were forced to increase prices due to the introduction of the excise tax regime, as well as strong depreciation of the local currency, which made imported raw materials much more expensive, according to analysts at Euromonitor International, a London-based strategic market research firm.

“The average unit price for alcoholic drinks increased by almost 20 percent in 2021.”

Analysts at FBNQuest said in a recent note that the average price of beer has increased by about 60 percent between 2019 and 2023, led by the premium beer category, which increased by 75 percent on average.

“Followed closely are the mainstream category at 58 percent and the value category at 46 percent respectively,” they said.

In March 2018, the Federal Government amended the excise regime by increasing the specific rate on tobacco and alcoholic beverages, which was N0.2 per centilitre (Cl) in 2017. The upward review, which went into effect in June that year to 2020, had no ad-valorem tax for alcoholic beverages except for tobacco.

Read also:Nigerian Breweries reports N67.8bn loss before tax in H1

A breakdown of the taxes from a 2018 PwC document show that beer and stout attracted N0.30 per Cl each in 2018 and N0.35 per Cl each in 2019 and 2020 while wine attracted N1.25 per Cl in 2018 and N1.5 per Cl in 2019 and 2020. Spirits had N1.00 per Cl in 2018, N1.75 per Cl in 2019 and N2.00 per Cl in 2020.

For wines and spirits, the 20 percent ad valorem rate rose to 30 percent. The specific rate for wines rose to N75 per litre from N50 per litre, while the rate for spirits increased to N150 from N50.

According to the 2023 Fiscal Policy Measures document signed in March by Zainab Ahmed, the then minister of finance, budget and national planning, the taxes to be paid by alcoholic beverage firms starting from June more than doubled.

But President Bola Tinubu in July postponed the enforcement of taxes in a bid to provide temporary reprieve to businesses and households groaning under the weight of new charges aimed at propping up government revenue.