FX revaluation woes haunt brewers as losses mount

For about 18 months now, Nigerian companies have been haunted by the devaluation of the Naira. With the Naira depreciating by over 70 percent in less than a year, companies reliant on imported inputs have faced substantial losses, which have impacted their bottom lines and diminished shareholder returns.

Nigeria’s leading alcoholic beverage companies, including Nigerian Breweries, Guinness Nigeria, and International Breweries, were not spared from the adverse conditions, reporting significant losses in FY 2023 and the first half of 2024.

In FY 2023, Nigerian Breweries posted a net loss of N105.8 billion, occasioned by an FX revaluation loss of N153.3 billion. Guinness Nigeria also posted a net loss of N54.8 billion at the end of its financial year ending June 30, 2024, reporting an FX revaluation loss of N89.4 billion and a N20.5 billion increase in its loan to Diageo International due to the devaluation of the Naira.

Since stabilising around the N1,500/$ level in May, the Naira has made a slow climb, now trading around N1,650/$ in the parallel and official markets. However, a review of the third-quarter financials of some of these beer makers shows that they are still reeling from the impact of the volatility of the Naira.

Nigerian Breweries at the end of the nine months ending September 30, 2024, posted a N149.5 billion net loss, with the group posting a N64.3 billion loss in the third quarter (Q3) of 2024. During the quarter ending September 30, 2024, Guinness Nigeria posted a net loss of N12.2 billion, in contrast with the N2.6 billion net profit recorded in the corresponding quarter of the previous financial year.

Read also: Naira hits record low at official FX market

Some factors are driving the poor financial showing of these two companies, including inflationary pressures, evidenced by significant year-on-year decline in their gross margins. Nigerian Breweries, during the first nine months of 2024 (9M 2024) posted a gross margin of 30 percent, an 8 percentage point decline from the 38 percent gross margin recorded in 9M 2023. Guinness Nigeria’s gross margin in the first quarter (Q1) 2025 was 11 percent, a significant decline from the 30 percent gross margin posted in Q1 2024.

Beyond inflationary pressures, this year’s Naira volatility has substantially impacted the cost of sales for Nigerian beer producers, given their heavy reliance on imported inputs. For example, Guinness Nigeria reported a sales cost of N111.6 billion in one quarter, marking a striking 170 percent year-on-year increase from the N41.4 billion recorded in the same quarter of the previous year. Nigerian Breweries’ raw material costs surged by 130 percent year-on-year in 9M 2024, reaching N407.2 billion, compared to N177.4 billion in the same period of 2023.

Naira’s volatility also played a significant role in their negative pre-tax earnings during the period. Nigerian Breweries posted an operating profit of N29 billion during the nine months. However, with a net FX revaluation loss of N160.5 billion as well as interest expenses of N71 billion, the company was dragged to a pre-tax loss of N203 billion.

Guinness Nigeria was on an operating loss of N6.9 billion. However, it had a net FX loss of about N8.5 billion. It also declined to a pre-tax loss of N16 billion. The company incurred an N7.4 billion loss on its FX balances, as well as N1.1 billion loss on the revaluation of its FX-denominated loans, and a N63.9 million loss on its letter of credit.

A review of the quarterly financial performance of the two companies show that they both were affected by the volatility of the Naira in Q2.

A supply chain expert noted, “Most companies like to see the goods before they pay for before payment. On the Raw Material Supply Agreement, there is usually a clause that highlights the number of days before payment can take place. For some, it’s usually 30, 60, 90 days.”

Champion Breweries was the only profitable publicly listed brewer, with a net profit of N370.6 million. In 9M 2024, the company posted a net profit of N21.5 million, after recording a N408.2 million net profit in Q3 2024.

Adoga Inalegwu, the managing director of Champion Breweries, explained how they posted profits in 2023, noting, “We hedged on key input materials in 2023.” He explained that the company entered into a supply arrangement in February 2023 to ensure that sorghum, its main input, was covered for the rest of that year.

The supply chain expert mentioned also noted, “Companies would have hedged against their losses if they pre-ordered their raw materials in 2023. However, it’s helpful if you have insurance that can protect against potential losses after payment.”

For the bigger players in the brewing sector, adopting this strategy would mean having sufficient access to FX as well as significant cash flows they can leverage. However, like most companies, brewers faced a FX shortage in 2023.