Rising costs, low purchasing power buffet brewing industry

By AYOOLA OLAOLUWA

Nigeria’s economic slowdown has hit the country’s brewery industry hard, with some of the major players recording the worst performance in 10 years.

According to the Half Year (H1) 2023 reports of four brewing companies operating in the country obtained by Business Hallmark, the entire sector performed dismally in the period under review.

BH findings revealed that though the travails of the brewery sector started a long time ago, it was compounded by the persistent rise in the cost of production, low purchasing power brought about by galloping inflation, rising inventories, multiple taxation and many other factors.

An analysis of Half Year 2023 financial results released by some of the brewing firms showed that the industry performed poorly in terms of profits in the period under review.

According to BH findings, many factors were responsible for the poor performances of the brewing companies. They include economic downturn, shrinking consumer disposable income, anti-business government policies and the persistent rise in the cost of production, among many others.

The first half of the year, based on the poor financial reports released by the brewers, is a period they will want to quickly put behind them.

For instance, out of the four beer makers listed on the Nigerian Exchange (NGX) that have released their half year results, three, namely Guinness Nigeria Plc, Nigerian Breweries Plc and International Breweries Plc, suffered heavy losses, while the fourth, Champion Breweries, experienced a huge decline in profit.

Specifically, Champion Breweries, owned by Heineken NV (with 85% controlling shares), Akwa Ibom State Government (10%) and the public (5%), reported a massive 269.4 percent decline in profit (N29.1 million) in H1’2023, compared to N1.07 billion it recorded in 2022.

The firm’s economic woes is also highlighted by the decline in its gross profit from N6.58 billion in 2022, compared to N5.71 billion recorded in half year 2023.

Based on BH analysis of previous year’s results, the figure represents Champion Breweries lowest profit in seven years.

A major factor to blame for Champion Breweries revenue losses is operating expenses, which is daily spiralling out of control owing to shocks experienced by the nation’s economy.

For instance, about 77.58 percent of the brewery’s total revenue was consumed by the cost of sales, which gulped N4.43 billion in the period under review.

In the same vein, operating costs recorded a rise of 29.4 percent to N1.24 billion in first half of 2023, as against N958.8 million utilized in the same period of 2022.

According to the financial report, the spikes in the company’s operating costs were primarily fuelled by a 56 percent increase in selling and distribution expenses.

“Apart from production costs, distribution expenses have gone up since crude oil prices appreciated in the international market.

“At the beginning of this year, diesel, used by many manufacturers to power plants and fuel distribution trucks, averaged about N560 per litre.

“By the end of June, it had gone up to about N700. It is now selling for about N1,000 in filling stations. Unfortunately, the trucks used by these brewers are heavy trucks that require massive fuel to power them.

“The results the companies are releasing now are going to be a child’s play when compared to the full year reports expected in January 2024.

“Local brewing firms, like all producers, are in serious trouble if this trend continued. The only thing that is keeping them in business is that the owners of the firms have deep purses and are riding out the storm with the hope that it will some blow over.

“Most Nigerian owned companies with less financial backbone would have gone under a long time ago”, declared Chief Pius Olateju, an industrialist, whose plant manufactures packaging materials like crates, bottles and corks for the brewing companies.

According to a developmental economist, Dr. Henry Akinbadejo, non-essential and luxury goods, like beer and expensive alcoholic drinks, are the first casualty as people start to cut cost and adjust to the loss of income.

“Beer and other refined alcoholic drinks are the kinds of discretionary goods that consumers in the developing world are quick to either buy when times are good or ditch when things get tough.

“Though, available data suggests that people tend to drink more when they are down or burdened, what happens is that they tend toward cheaper brands, when they can no longer afford the normally expensive popular brands”, Akinbadejo said.

Meanwhile, while revenue from sales continues to crash and operating costs soar, Champion Breweries’ total equity and liabilities stood at a whooping N17.83 billion in the period under review.

Also, the firm’s cash and liquid cash (cash equivalents) witnessed a decline of 51.78% (N1.35 billion) in the first half of 2023, compared to N2.81 billion recorded in HY’2022.

While Champion Breweries seemed to have received the softer end of the sledgehammer, its more bigger competitors, Nigerian Breweries Plc, International Breweries Plc, and Guinness Nigeria Plc, were severely battered by the headwinds.

According to BH analysis of the companies H1’2023 results, the trio suffered a combined loss of N89.4 billion as borrowing costs and revenue failed to match costs, compared to a profit of N34.7 billion in the same period of last year.

The statements released by the three firms confirmed that they were unable to combat inflationary trends as finance cost accounted for over 90% of their operating expenses.

For instance, while Guinness Nigeria recorded the biggest increase in finance cost of N53.3 billion (2,402.3%) from N2.13 billion in 2022, Nigerian Breweries saw its finance cost jump by 262.5 percent to N11.2 billion from N3.09 billion.

International Breweries Plc, on the other hand, fared a bit better, restricting its finance cost to N13.17 billion in the period under review.

Despite IBL management’s valiant efforts, the percentage rise in finance cost in the period under review was 128.4 percent (N13.17 billion), compared to N5.78 billion in the corresponding period in 2022.

Guinness Nigeria travails is exacerbated by the narrow base of its products, with the exception of its premium brand, Guinness Stout, unlike it competitors that have multiple popular brands in their stables.

BH checks revealed that the company has 13 products, namely Harp, Guinness, Johnnie Walker, Baileys, Smirnoff, Gordon’s Dry Gin, Satzenbrau, Dubic Malt, Malta Guinness, Orijin Non-alcoholic Zero, Orijin and MrDowell’s in its stable.

However, apart from Guinness Stout that is doing relatively well in the market, others are playing laggards to their competitors, which have largely cornered the beer and beverage market before the introduction of the products.

“What they (Guinness 12 other products) are doing is just catch-up. Malta and Origin drinks produced by Guinness are averagely doing well. While Malta has been playing second fiddle to Amstel produced by Nigerian Breweries, Origin Roots is unarguably the market leader in the roots drink market.

However, Ace Roots by Nigerian Breweries and others like Alomo Bitters are giving Origin a run for its money.

“Guinness would have been able to compete with competitors had it been that its other product are as acceptable like the Stout”, a brand expert, Tomisin Oshin, noted.

Speaking with our correspondent in an interview in 2018, a former Managing Director of Guinness Nigeria Plc., Peter Ndegwa, had said that the rising volumes and falling profits of the company reflected a huge ‘down-trade’ among drinkers.

According to Ndegwa, at the start of the decade, beer sales were dominated by mainstream and premium brands, such as the Harp Lager and Guinness Foreign Extra Stout.

The ex-Guinness helmsman noted that back then, the so-called value beers, produced by small regional breweries, had less than 15 per cent of the market.

“By 2015, their share had risen to 30-35 per cent and has since doubled to two-thirds. This is a segment that almost didn’t exist six years ago. It has transformed the dynamics of the industry.

“We have to change tactics. It is no longer a question of category. We have gone from offering premium beer to offering spirits, beer and adult soft drinks at prices the consumer can afford”, Ndegwa had stated.

An economist, Dr. Peju Olajumoke, explained that the high cost of finance is caused by dwindling sales and revenue.

“Businesses, especially manufactures, are also experiencing what Nigeria as a nation is passing through in the area of growing debts.

“The moment there is no commensurate sales/income to meet up with expenses, funds must be looked for elsewhere, which is mostly through borrowing.

“That is where deficit financing comes in. As you know, financing costs, also known as the cost of finances, are costs, interests, and other charges involved in the borrowing of money to purchase or produce assets.

“And in Nigeria, it (interest) is in double digits. I should quickly note that these companies are blue chips with access to lower interest loans, which ordinary firms don’t have access to.

“The crisis in the sector is, however, temporary. The recent devaluation of the naira following the floating of the currency in June, coupled with rising interest rates led to increased operating costs for multinationals, whose major costs, including finance, are denominated in foreign currencies.

“There is a general consensus that things will improve by the end of the year or early 2024, when the economy must have stabilized.

“By that time, the purchasing powers of many Nigerians, we believe, would have improved for them to go back to their old habits and indulgences like beer consumption.

“But as things stand, Nigerians are cutting costs and only going for essential commodities like food to preserve body and soul. Is it not when you are done eating well that you think of drinking beer?”, Dr. Olajumoke asked rhetorically.

Also speaking, Omobola Adu, an economist at BancTrust & Co, noted that the firms performance highlights the pressures consumer goods firms are facing.

“Some brewers are making losses largely because of the impact of the foreign exchange reform on their finance costs.

“When finance cost jumps significantly, it can erode all the significant profit companies make such that in terms of net profits, they are making losses.

“They are dealing with different macro factors that are impacting their topline performance”, Adu stated.

Reacting to the poor results of his firm, the Company Secretary at Nigerian Breweries, Uaboi Agbebaku, blamed it on the macro economic climate in the country.

“The second quarter was significantly impacted by various factors including the effect of fuel subsidy removal on consumers, naira devaluation and its effect on input cost, and mostly the revaluation of foreign exchange obligations.

“Together with the cash crunch, which materially impacted the 1st quarter, the company’s net loss escalated in H1,” Agbebaku lamented.