Consumer substitute punctures Guinness top-line driver

As prevailing macro-headwinds continue to shape consumers discretionary spend, one of major top-line drivers of Guinness Nigeria plc may have been a victim of a swing to its alternative in the beer market.

Nigeria’s second largest brewer and a subsidiary of Diageo plc with a market share of 24 percent, published its unaudited financial results for the half-year ended December 31, 2015.

The results at the Nigerian Stock Exchange (NSE) show year-on-year PBT declined by 65 percent to N1.652billion, from a corresponding year highs of N4.658billion, while after tax profit declined by 66 percent to N1.172billion from N3.3billion.

Revenue declined by 10 percent to N49.836billion from corresponding year level of N55.267billion.

The company’s current score card came in as a massive surprise to investors who expected its fairly new product lines to keep sales revenue afloat for the period, pending the time we see a significant recovery in the overall economic activity.

The brewing giant’s H1 numbers showed its Earnings per Share (EPS) – a measure of the portion of its profit that is allocated to each outstanding share of common stock –declined by 66 percent to 78kobo from 226kobo. Guinness shares joined the league of top-five losers Monday, at the Nigerian stock market as its share price lost N4.3, from N115.5 to N111.2.

Guinness introduced Orijin brand at a time when Nigeria’s beer volumes were slowing, and this had a positive impact on revenue growth for the company.

“The initial euphoria over the brand (Orijin) appears to have decelerated and increased competition from other brewers in the space has taken a significant bite from Orijin volume,” said Efemena Esalomi, consumer analyst at Lagos-based Vetiva Capital Management Limited, in an emailed response to BusinessDay.

“It is important for Guinness to sustain a competitive position in this segment. Diageo has reported strong double digit volume improvement in two of its major brands, Guinness FES and Malta Guinness, which if sustained, will help to cushion the impact of slowing volumes in Orijin in the near term,” she added.

Analysts said consumers shift to low sugar made Ace Roots rival product from the Nigerian Breweries plc helped put a major crack on Orijin’s wheels.

The Tunde Abidoye- led, team of research analysts at FBNQuest said  although “Orijin”, Guinness Nigeria’s herbal drink, helped boost both top-line and bottom line growth for a couple of quarters in full year 2015, “we believe that the sales growth momentum has slowed down,  particularly given the introduction of Ace Roots, a rival product from Nigerian Breweries.

“Although prevailing macro-headwinds and weak consumer discretionary spend have constrained topline growth for most consumer goods companies, including the brewers, we believe that Guinness Nigeria has been more impacted than its rivals, due to limited representation in the value category.

“As such, Guinness’ sales growth has slowed down as consumers down-trade to cheaper value brands.Given that about 60percent of its raw materials are imported, we believe that the gross margin contraction was most likely driven by a marked rise in raw material costs on the back of FX  pressures”, FBNQuest analysts added.

Investment analysts at Capital Bancorp Plc, said, “We downgrade our recommendation on Guinness Nigeria to a sell position with regard to its latest result released to the public.

“Guinness Nigeria Q2 numbers showed a significant drop in revenue, suggesting its inability to drive sales. Going forward, we are bearish on the company’s ability to turn this current position to improved profitability in the next two quarters of the remaining financial year and the medium term, thus prompting our revaluation and forecast on the company’s earnings”, the analysts at Capital Bancorp plc added.

Peter Ndegwa, Managing Director and Chief Executive Officer, Guinness Nigeria plc, who acknowledged that sales revenue came under pressure, linked it to the weakening operating environment.

“The contraction in economic activities during the period negatively affected our business. A significant erosion of consumer disposable income and consequent down-trading by price sensitive consumers took its toll on the industry and affected top line growth.

“In spite of the deterioration in the economy, our premium core brands showed recovery and resilience during the period, with Guinness Foreign Extra Stout and Malta Guinness recording double digit shipment growth, reflecting momentum against a weak period.

“Satzenbrau also performed strongly during the period, with half year net sales growth of 54% as the brand builds its position in the growing value beer segment. However, this was not sufficient to impact the operating profit which declined by 51.6% during the period”, Ndegwa said in an emailed statement to BusinessDay.

“We have maintained our marketing investments despite these headwinds as we launched the first Guinness stout innovation in ten years with Guinness Africa Special just before Christmas and leveraged our “Every Minute Made of Black” National Consumer Promotion campaign to drive consumer affinity for the brand.

“In the second half, we expect to see some improvement in sales with innovation and the distribution of Diageo’s international premium and mainstream spirits brands which have been integrated into our business, although the set up costs mean that the operating margin is not expected to benefit until the next financial year. However, this is subject to an improvement in the trading environment which remains volatile, with speculation of possible currency devaluation, non-availability of foreign exchange, even for eligible transactions and inflationary pressure,” Ndegwa said.

Iheanyi Nwachukwu & Chinwe Agbeze