Brewers are walking on tight rope
A few years ago, brewers were optimistic that a burgeoning young population that for consumption would spur investment as they launched new products and embarked on restructuring.
The prognosis for the economy were benign that ABInBEV- the world largest beer maker- decided to merge three subsidiaries in Nigeria (International Breweries, Pabod Breweries and Intafact Breweries), and it also spent $250 million on the construction of three new plants.
As at today, however, a stuttering economy, deteriorating consumer spending, stiff competition, slow volume growth, higher material costs, and higher excise duties, have eroded the earnings of beer makers, making the sector the worst performer among the fast moving consumer goods firms.
The numbers from the Nigeria Stock Exchange (NSE) are bad, sending a chill down the spine of investors.
For instance, the combine revenue of the three largest players (Nigerian Breweries Nigeria Plc, Guinness Nigeria Plc, and International Breweries) increased by 4.81 percent as at September 2019.
That compares with an uptick of 21.33 percent recorded in 2018-17 financial year and 16.50 percent increase in 2017-16.
Guinness and International Breweries recorded losses of N370.15 million and N16.44 billion in the first nine months of the year, while Nigerian Breweries saw a 17.01 percent drop in net income, as margins continue to deteriorate.
The cumulative average net profit of the largest beer makers stood at (0.045 percent) as at September 2019, which means they are not turning each Naira invested sales into higher profit.
International Breweries may continue to struggle as it has a debt load of N243.82 billion as at September 2019, which is 13 times higher than total equity of N18.17 billion, as it a step away from technical insolvency.
With the terrain still challenging, analysts believe brewers will be cautious on price increase as they look to pass on the burden of increase in alcoholic beverage and fend off the effect of rising inflation.
Also, consumers are likely to respond a hike by switching to cheaper brands, while industry players could lose market share to smaller brands.
Guinness plans to increase its share of income from spirits, and Nigerian Breweries in focusing on its premium Heineken, stout and malt drinks.
In May, Nigerian Breweries had said it was mulling a hike in product to compensate for inflation and heavy levies.
“While a price increase is positive for Guinnees, but it is losing market share to the other players. So a price increase might be offset by a stepper volume decline,” said Yinka Ademuwagun, analyst at United Capital Limited.
The rate of growth in the Nigerian economy has been slow, unemployment high, poverty high, while the new minimum wage has not been implemented.
GDP expanded by 1.90 percent in the second quarter of 2019, a decline of 2.10 in the first quarter (Q2) of 2018, and below 2.38 percent growth in the fourth quarter of 2018, according to data from the National Bureau of Statistics (NBS)
The manufacturing industry contracted by 0.13 percent, and another contraction means the industry will slip into a recession.
The proposed plan by the Federal Government to increase Value added Tax (VAT) to 7.50 percent from 5 percent, hike electricity tariffs could damp consumer spending in a country where over 50 percent of its population live on less than $1.59 a day.
The future of economic growth and development in Nigeria lies in the private sector, thus we believe the federal government must begin to implement policies that would foster a more accommodating business environment, according to analysts at CSL Research Limited.
The report also revealed that beer makes up just 16 percent of alcohol consumption in Nigeria, while other drinks make up 84 percent due to the high popularity of home-brewed beverages in the country
Nigeria has an average beer consumption of 12.28 litres per year, the largest in Africa, according to a report by the Market Research Group
There are over 8 functional breweries in Nigeria with a cumulative production capacity of over 17.72 million hl/a majority. The majority of these breweries are situated in Southern part of Nigeria.