Federal Government’s decision to hike excise duties on alcohol will add to the woes of brewers already hard hit by a non performing economy.
Industry giants like Nigerian Breweries Plc, Guinness Nigeria Plc, and International Breweries Plc, are grappling with deteriorating profit margin and intense competition, while receding cash margins means they are running out of cash to fund expansion, reduce debt and pay dividend.
President Muhammadu Buhari, in a bid to shore up government revenue after a sharp drop in crude price of mid 2014 deal a blow on external reserves, is to embark on a downward review of the 2018 excise duties imposed on brewing companies in Nigeria.
It has been argued that incremental rises in these products (alcohol and tobacco) somewhat aligns with global best practices, because most Governments around the world generally tax alcoholic drinks and tobacco for the dual purpose of revenue generation and discouraging the harmful effects of such products.
However, an increase in taxes on these products could further hurt the sales of firms that are already struggling with to low consumer purchasing power and decrepit infrastructure.
READ ALSO: Why Heineken’s acquisition of NB stocks matters for brewers
For instance, Nigeria Breweries recorded a 26.15 percent reduction in net income to N9.98 billion in December 2018 while revenue fell by 6.13 percent to N324.38 billion in the period under review.
The company is inefficient in using cash in generating a Naira in sales as operating profit margin fell to 19.30 percent in December 2018 from 30.14 percent the previous year.
Operating cash flow margin is a cash flow ratio which measures cash from operating activities as a percentage of sales revenue in a given period. It tells how well the company converts sales to cash—and cash is of critical importance because it’s required to pay expenses.
Guinness Nigeria, beset by competition, recorded a 3.96 percent reduction in sales as at nine month ended September 2018 while gross profit margin to 30.23 percent as at September 2018 from 34.01 percent the previous year.
International Breweries Plc recorded a loss of N7.13 billion for the period ended December 2018 while earnings before interest and tax otherwise known as operating profit margin fell to 3.34 percent in September 2018 from 11.57 percent the previous year.
International Breweries, the local unit of AB InBev, is running out of cash as it recorded a negative operating cash flow of N36.80 billion in the nine month to September 2018.
The negative cash position is largely due to losses, overinvestment in fixed assets without corresponding increases inflows, and huge receivables as a sluggish economy has hindered customers from paying debt owned.
International Breweries shares have shed 22.95 percent since the start of the year while market capitalization stood at N202.0 billion as of Tuesday 2:00 pm. Guinness Nigeria’s share price has shed 16.67 percent since the start of the year while market capitalization stood at N131.42 billion. Nigerian Breweries’ share price returned -42.03 percent year to date (YTD), valuing it at N481.41 billion.
Consumers have remained sensitive to price movement in the past few years and they are getting poorer while rate of unemployment rate is rising as consumer products are increasingly becoming inaccessible.
Nigeria with a population of 180 million people has 87 million people, nearly half its population, in extreme poverty; as high inflation environment continues to erode discretionary income.
The World Bank has said that the Nigerian economy has been slipping since 1995 and this continued till 2018.
While gross domestic product (GDP) grew by 2.38 percent in the fourth quarter of 2018 from 2.10 the corresponding period of 2017, the growth rate is lower than the 7.50 percent recorded over a decade ago.
With the environment still challenging, brewers are scambling to increase their share of drinks exempted from excise duties.
Guinness plans to increase its share of income from spirits, and Nigerian Breweries is focusing on its premium Heineken, stout and malt drinks for growth.
BALA AUGIE
