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Published On: Sun, Sep 3rd, 2017

Breweries battle poor returns on lager

OKEY ONYENWEAKU

Almost all sectors of the economy have got bloodied as a result of a crippling economic recession which has seen five consecutive quarters of negative growth until the marginal reversal of 0.52 per cent in the first quarter of 2017. The brewery sector is no exception.
However, what comes as a bit of a surprise is that quite a number of industry analysts have projected  that the economy will exit the recession by the end of the third quarter of the year as the country waits for gross domestic output growth data for the second quarter of the year ended in June.
The growing optimism has been sustained by half year financial results of listed companies on the Nigerian Stock Exchange (NSE) which in the main have shown steady growth in earnings over the comparable period of 2016.
The equity market has already gained over 30 per cent year to date. The brewery sector has responded to the rising tide of enthusiasm by posting healthy growth in sales and profits but the pace seems to be slowing.
The Nigerian brewing business has continued to thrive in the face of weak overall consumer demand because of what an analysts has called a ‘contrarian bias’ or a situation that plays against expectations. The psychology of beer consumption is peculiar. In recessions consumer demand tends to pale off, but beer demand contrary to common market logic actually increases as people try to fend off the mental anguish of lower incomes or job loss by knocking back a few bottles. Early signs in the third quarter of the year, however, seem to show signs of demand slowing down.  According to a recent GTI report, the Deutsche Bank Market Research unit noted that Nigeria is Africa’s largest alcohol consuming nation with over 36% of the continents market share.
Tighter margins and slower sales growth has resulted in a major series of consolidations which has led to an industry with two major brewers and a number of satellite minions. The two major rivals in the market are Nigerian Breweries owned by Heineken and Guinness Nigeria owned by Diageo. A new major entrant is SAB Miller brewers of Hero beer, muddying the competitive waters even further.
Research by Heineken suggests that the country’s beer market is expected to grow by a compound annual rate of 5.6% between 2011 and 2020.
GTI research breaks the market into slices where Heineken has a commanding 71% share of the market through its subsidiary, Nigerian Breweries; Diageo has a 27% Market share through its stake in Guinness Nigeria; while SABMiller of South African joined the fray with its acquisition of Pabod Breweries in 2008 and International Breweries in 2012.
Review of the sector turns up a number of interesting results:

GUINNESS NIGERIA
Guinness Nigeria Plc, the nation’s leading alcoholic beverage manufacturer and a subsidiary of Diageo Plc, has probably concluded its Rights Issue to raise fresh capital to the tune of N40 billion to help drag the company out of financial depression. However, its unaudited third quarter result shows revenue growth of 29% and a 6% increase in gross profit when compared to the same nine-month period in 2016. According to the company’s report, the first half volume growth continued in the third quarter.  Cost of sales increased dangerously by 47% in the nine months due to the challenging economic environment. Finance costs was  also on the increase compared with last year.
Its loss streak continued in the nine months results as its loss after tax stood at  N2.6 billion.
In his response to the company’s results Mr. Peter Ndegwa, the company’s Managing Director and Chief Executive Officer said  the company was making a difference in revenue growth in the challenging operating environment.
“We have been able to deliver strong sales growth even in a challenging operating environment marked by a significant erosion of consumer disposable income.
This encouraging result is attributable to increased volumes and the realisation of pricing benefits. We have started to see the benefit of our broader portfolio product offerings across beer and spirits and across an increased variety of formats. We have also seen resilience in the performance of our premium core brands and improving growth of our more accessible brands.”
“Our gross profit continues to be impacted by the significantly higher raw material costs as a result of devaluation and the significant local input inflation, but benefitted in the quarter from supplier rebates.The company continues to make progress on its commitment to drive out costs across a number of areas as shown by distribution expenses that are down 16% compared to the previous year. Our financing costs at N6.7 billion for the year to date include N1.9 billion of unrealised foreign exchange losses on hard currency liabilities. As a result, we have reported a N2.6 billion post tax loss versus a N0.9 billion profit in the prior year.” he explained
It had  posted a disappointing N4.67 billion loss on the first half of 2016. More disturbing is that its shares have lost 9.09 per cent Year to Date.

CHAMPION BREWERIES
Champion Breweries Plc, the Akwa Ibom-based brewer reported a 9% growth in net profit for the six months ended 30th June. Its net earnings also rose to N86m in 2017 from N79m in the previous year. Pushing against the weak economy,  the company’s profit soared 114% to 47million from N22 million.
Sales reached N2.3bn from N1.8bn in 2016 as cost of sales grew 33% reflecting higher input costs and inflation. However, the firm managed its  expenses as selling and administrative expenses stayed nearly the same from the previous year.
Champion Breweries recorded 587% growth in profit for 2016. Its shares have lost 2.83 per cent Year to Date.

NIGERIAN BREWERIES PLC
Nigerian Breweries plc reported revenue growth of 15 per cent in the half year results  ended june 30, 2017 from N157.3 billion in 2016 to N181 billion. Profit before and after tax also rose 33.3 per cent and 24 per cent respectively in the review period.
Details reveal that PBT rose from N25.5 billion in 2016 to N34 billion in 2017 while profit after tax advanced from N19.064 billion to N23.7 billion. However, cost of sales was up 19 per cent from N83.3 billion to N99.6 billion. At the close of business, Nigerian breweries operating cost also increased by 15 per cent from N33.9 billion to N39.3 billion in 2017.
Basic earnings per share stood at 297 kobo.
Meanwhile, Nigeria’s brewing giant, Nigerian Breweries Plc had in 2016 recorded a profit  after-tax decline  for the full year ended December 2016 by 25.37 percent to N28.4 billion from N38.0 billion recorded a year earlier.
Pretax profit for the review period also dipped 27.31 percent to N39.6 billion from N54.5 billion in the same period of 2015.
However, revenue of the brewer grew from N293.9 billion in 2015 end to N313.7 billion in the review period of 2016; indicating a growth of 6.75 percent, Nigeria.
The company’s shares have gained 26 per cent Year to Date from N142.00 a share early January 2017 to N180.00 last Friday August 31, 2017.

INTERNATIONAL BREWERIES Plc
International Breweries Plc grew its profit before tax by 89 per cent while profit after tax also rose by 56 per cent for the year ended March 2017. However, the company’s expenses grew 115 in the year. While sales of N10.0 billion grew by 47 per cent.
Similarly, operating expenses doubled to N1.7bn from N769m in Q4 2016.
On a full year basis, sales of N32.7bn grew by 41% during the full year circle..
The macroeconomic challenges have not been fair to producers of beer given the drop in the price of crude, volatility in fx liquidity among other hiccups.  The squeeze on household wallets has also led consumers  to go for cheaper brands.
Meanwhile, International Breweries is currently discussing merger with Intafact Beverages limited (Intafact) and pabod Breweries limited.
While the brewers have blamed the shrinking economy which saw a sharp fall in the price of crude from $114 per barrel in June 2014 to $32 before the end of 2015 as a principal cause of lower domestic demand for its products, independent analysts claim that part of the sectors problem is a palpable loss in market share due to a growing bargain basement market for beer. Premium beer brands are increasingly losing space on the average consumer’s shopping list as cheaper brands create greater spending flexibility in the face of a biting recession.
The breweries sector has been deeply challenged since 2013 and is suffering a decline.
This many believe is hurting sales volume and squeezing margins for all the operators.
Low consumer spending has also been fingered for its challenges. Among the troubles of the industry is rising consumer prices and growing volumes of unpaid workers’ salaries in public and private sectors, in addition the increasing unemployment. Stiffer competition in the sector and companies seem to increase the cost of sales now than ever before.
Others opine that  increasing health consciousness amongst the Nigerian middle class, religious beliefs and Sharia laws in some part of the Northern region are part of the challenges of the industry.
Also challenging the market share of brewers is  increasing competition from non-alcoholic beverages as well as other alcoholic beverages such as the low end gin products (Alomo bitters) .
Analysts have said the brewers have not performed  as expected in recent times, fingering insecurity in the country as part of its challenges.
”The results have not been good. Weak demand for its products is affecting its bottom-line. Its big market in the North East which has been affected adversely by the nefarious activities of Boko Haram”, Said a Lagos based analyst, Managing Director, High Cap Securities Limited, David Adonri.
Similarly, Managing Director of Crane Securities Limited, Mr Mike Ezeh, told Business Hallmark that it is difficult for companies to perform magic in an economy that is experiencing recession.
”The company has been posting losses.
Information drives the market, so if there is a good information it affects any company’s shares positively and negatively if it otherwise”, he said.
Agusto & Co., Research, Credit Ratings, Credit Risk Management had rated Guinness Nigeria Plc a in 2015 as having inadequate working capital, adding that stiff competition for products in the value segments and Sub-optimal distribution network in rural areas are also some its challenges.
On the contrary, GTI research has expressed optimism that the Nigerian middle class was growing,  “we estimate a current installed capacity deficit of 53 million hectolitres to service the potential market”. GTI paints a rossy picture of a normal country with a normal economy. But analysts are not particularly impressed by the argument, as they do not see something significant that would propel the economy taking place in the next three years. However, the consensus is that the macro-economy in Nigeria has a role to play in the sustainable health of any sector in the country. Therefore, the good or bad of the economy will determine to a reasonable extent to the performance of the brewers.

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