• Tuesday, May 28, 2024
businessday logo

BusinessDay

Seven Up’s margin shrinks on intense competition and rising costs

Bottler maintains growth momentum as earnings rise 16.13%

Seven-Up Bottling Plc’s margins shrank as the Nigerian beverage producer was confronted with higher production costs and increasing competition.

For the half-year ended September 2017, Seven Up’s gross margin fell to 15.91 per cent from 18.86 per cent the previous year.

Gross margins a measure of profitability is a company’s total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage.

READ ALSO: Abdul-Rahman Buhari wins 2020 7up Harvard Business School Scholarship

The higher the percentage, the more the company retains on each naira of sales, to service its other costs and debt obligations.

The company has a one year return of -30.43 per cent while its share price closes at N90 as of 2:00 pm on Tuesday, November 21.

While Seven Up is grappling with rising costs, experts are of the view that intense competition from rival firms is cannibalizing sales.

The company is increasingly losing market share to rival companies as patronage from consumers have reduced, according to an industry expert, who doesn’t want his name mentioned because of the sensitivity of the matter.

READ ALSO: No more Seven-Up for investors as bottler delists from Exchange

“They have to rebrand and come up with market penetrating product. They should also deepen their marketing and distribution network,” said the expert.

Demographic change is also affecting Seven-Up as a lot of the young generation prefer Coca Cola and Pepsi products. 

These two rivals have a solid brand while their focus and market strategies help underpin sales.

Seven Up’s 13.50 per cent increase in sales in the period under review is one of the lowest among 12 largest consumer goods firms, according to data gathered by BusinessDay.

The Nigerian beverage producer’s sales were unable to cover rising costs and interest expense as it posted a loss after tax of N6.25 billion in the half-year ended September 2017, from a loss of N1.55 billion the previous year.

Cost of sales ratios increased to 84.08 per cent in the period under review from 81.01 per cent the previous year. This means the firm has spent N84 on input cost to produce every N100 of unit generated in sales.

Seven-Up has a high gearing ratio, which means it has high debt in its capital structure as the debt to equity ratio increased to 548.85 per cent in the period under review from 114.85 per cent the previous year.

Interest coverage ratios stood at -1.32 per cent in the period under review. This means the firm’s operating profit could not cover interest expense.

Seven-Up posted an operating loss of N2.68 billion in the period under review.

Investors are keen on corporate leverage as they perceive a highly indebted firm as being riskier hence they demand a high return for investing in the firm.

Seven-Up will have to grow sales more than it is doing at the moment to cover all costs and bolster margins.

READ ALSO: Seven-Up boosts Nigeria’s Covid-19 effort with a donation to food relief projects

While the Nigerian beverage producer’s margins are shrinking, other consumer goods firms are enjoying margin expansion.

Five of the seven largest listed consumer firms were able to pass on the higher cost to consumers in the third quarter as margins rose.

The firms are Dangote Sugar, Nestle, Unilever, Cadbury and Nascon Allied Industries.

The cumulative average gross margins of the five firms increased to 27.43 per cent in the third quarter (Q3), 2017 financial period from 23.89 per cent the previous year (2016), according to data compiled by BusinessDay.

Drilling down into the figures shows Dangote Sugar had the biggest jump in gross margins as it increased to 25.44 per cent in September 2017 from 16.48 per cent the previous year.

Unilever Plc’s gross margins moved to 10.88 per cent in September 2017 as against 8.71 per cent as at September 2016, while Cadbury’s gross margin increased to 23.05 per cent in September 2017 from 21 per cent the previous year.

Nascon Allied Industries Plc’s gross margins rose to 36.82 per cent in the period under review as against 33.32 per cent as at September 2016, while Nestle Nigeria’s gross margins increased to 40.96 per cent in 2017 from 40.10 per cent the previous year.

On the flip side, the combined average gross margins of two firms (Flour Mills and PZ Cussons’) dipped to 21.50 per cent in September 2017 from 24.37 per cent as at September 2016.

Flour Mills’ gross margins fell to 11.89 per cent while PZ Cussons’ gross margins reduced to 31.70 per cent in the period under review from 34.51 per cent as at September 2016.

DAVID IBEMERE