New Excise Duty Bursts Beer Producers’ Bubble

With a near-bumper harvest for their 2022 operations, there is every reason for beer manufacturers to push more bottles of beer into the Nigerian market. However, with the revised excise duty rates which begin next month, local brewers will either cut down production or raise prices. Whatever decision is taken will definitely affect the quantity and quality of beer consumed in the country, writes Festus Akanbi

There are fears that manufacturers of alcoholic beverages which recorded a set of modest gains in their last year’s performances may slip into loss territory as the federal government’s newly revised excise duty rates (taxes) take effect from June this year.

A report had put the total revenue of drink producers in Nigeria at N900 billion in 2022, an improvement of N161.76 billion over the annual turnover reported in 12 months of the preceding year, when the industry leaders, Nigerian Breweries, International Breweries, Guinness Nigeria and Champion Brewery grossed N738.26 billion in revenue. 

According to financial statements analysed by Prime Business Africa, an online news medium, this means that the consumption of alcoholic and soft drinks increased by 22 per cent year-on-year. 

For a country with blinding poverty and frustrations caused by the failure of government at all levels, sociologists say it is not out of place for people to depend on alcohol for succour. This implies that manufacturers of alcoholic drinks, especially beer would continue to smile to the bank.

However, such a positive projection is being threatened by a new regime of taxes unveiled by the federal government last week, as going forward, manufacturers of such products will have to choose between raising the prices of their products or closing shop.

In the 2023 Fiscal Policy Measures (FPM) document signed last month by the minister of finance, budget, and national planning, Zainab Ahmed, the total specific rate for beer and stout, wines, and spirits (per litre) is now N300, a 114.3 per cent growth from N140 last year. Tobacco’s specific rate is N8.20 per stick, a 95.3 per cent increase from N4.2 per stick in 2022.

It is also 76.4 per cent higher than the rates they were meant to pay this year before the review and 32.5 per cent (N408.2) higher in 2024.

Industry operators and other pressure groups are already crying foul for the sudden tax increase which they said was done without any consultation with the members of the organised private sector.

Falling Volume, Slimmer Profit Margins

Consequently, there are fears, according to the Deputy President of Lagos Chamber of Commerce and Industry, Gabriel Idahosa that the volumes of alcohol and tobacco products will reduce “since they are not matters of absolute necessities for consumers”.

“We should also expect slimmer profits margins for the companies and returns to investments for shareholders are likely to reduce,” he said.

He said for smaller products or companies in the brewery industry, the combination of reduced consumption and lower profit margins may knock them out of business or struggle to survive, which could eventually lead to job losses.

“Ultimately, it will affect the supply chain from the people who supply the raw materials to those involved in the transportation and distribution of the products in the country, further causing a decline to the Gross Domestic Product (GDP),” he said.

This fear was shared by the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, who warned that the revised excise duties might wipe out the brewery and other related sectors because they are already dealing with the high cost of foreign exchange, high energy costs, transportation, and multiple taxations.

“The government has not been fair to the alcoholic industry. Many are struggling. And these new taxes might close their shops because they are already dealing with the problem of sales as a result of weak demand caused by the high inflation in the country,” he said.

Yusuf said the increased rates would reduce the industry’s revenues and profits, thereby affecting their ability to pay for other taxes like education, company income and Value Added Tax. “You don’t increase revenue by killing the people who are giving it to you.”

2022 Performances

Analysing the performance of industry operators for their 2022 operations, Prime Business Africa’s report showed that Champion Breweries closed last year as the best-performing brewer despite its products; Champion Lager Beer and Champ Malta, not being household brands when compared to those of its market rivals. 

According to the report, the analysis of Champion Brewery’s earnings showed that its revenue grew by 28.56 per cent year-on-year after grossing N12.28 billion turnover in 2022, surpassing the N9.55 billion revenue generated in 2021. 

“Champion Brewery spent N7.51 billion to produce its products last year, but the year before, the company recorded N6.02 billion cost of production. 

“However, the 25 per cent growth in the cost of sales didn’t impede growth in Champion Brewery’s net profit, as the brewer closed 2022 with N1.58 billion. This is a 48 per cent growth in PAT, considering its net profit was N1.07 billion in 2021. The revenue growth did enough to increase Champion Brewery’s industry market share to 1.37 per cent last year, from 1.29 per cent. It has the fourth-largest market share.”

For Nigerian Breweries, the report stated that customers spent N550.63 billion to purchase the firm’s products in 2022, translating to a 25.92 per cent growth when compared to the N437.28 billion revenue generated from sales of its brands in 2021. 

After the cost of sales, tax, and other expenses were removed from Nigerian Breweries’ revenue, the company ended last year with N13.18 billion profit after tax, which indicates 4.06 per cent growth in its profit which was N12.67 billion in 2021. 

Despite occupying the second spot on the best-performing list, Nigerian Breweries retained its spot as the market leader with 61.18 per cent market share, which grew from 59.23 per cent in 2021. 

The report put Guinness Nigeria in the third spot despite not growing its revenue as high as International Breweries because the latter reported a loss after tax. Guinness’ revenue rose by 8.55 per cent year-on-year, from N109.12 billion generated in 2021 to N118.45 billion grossed from selling Guinness brands, Harp Lager, Smirnoff Ice, Dubic Malt, Orijin brands, Smirnoff, among others. 

At the end of 2022, Guinness finished as the third largest market shareholder in the brewery industry, accounting for 13.16 per cent of the market share based on revenue, dropping from 14.78 per cent.

Next is International Breweries which grew its revenue by 20 per cent. The revenue generated by International Breweries within the 12 months of last year was N218.65 billion. This means the firm’s customers spent N36.35 billion more than the N182.29 billion used to consume the company’s brands.

Beer Makers Under Pressure

Industry analysts said the pressure is now on manufacturers who have no choice but to pass the additional cost to consumers. 

“That is why they have to make noise or campaign about the tax increment to let people know that the government is taxing them massively. That is the only way they can pass costs without any negative impact on their business,” a market analyst said.

He added that even if they don’t increase prices to preserve market share or competition, it would lead to some sort of pressure on them.

According to AsokoInsight market data, beer is the most widely consumed alcoholic beverage with a 55 per cent market share, followed by spirits (30 per cent) and wine (15 per cent). Spirits are gaining traction, with Guinness Nigeria Plc now focusing attention on the segment.

But top players in the alcoholic industry such as Nigerian Breweries Plc, International Breweries Plc and Guinness Nigeria, have been struggling since 2019 following the increment in excise duties in a challenging operating environment.

In 2021, manufacturers were forced to increase prices due to the introduction of the excise tax regime, as well as the strong depreciation of the local currency, which made imported raw materials much more expensive, according to analysts at Euromonitor International, a London-based strategic market research firm. “The average unit price for alcoholic drinks increased by almost 20 per cent in 2021.”

From their financial reports, Nigerian Breweries made a profit of N7.4 billion in 2020, a 54 per cent decline from a profit of N16.1 billion in 2019, while its revenue grew by 4.3 per cent to N337 billion in 2020 from N323 billion in 2019.

International Breweries made a loss of N12.3 billion in 2020 even though revenue grew by 3.3 per cent to N136.7 billion in 2020. Guinness Nigeria posted a loss of N11.4 billion in 2020, compared to a profit of N4.12 billion in 2019. Revenue declined by 18 per cent to N108 billion in 2020.

Nigerian Breweries’ revenue improved by 51 per cent to N437.3 billion in 2021 from N337.1 billion in 2020; the revenue of Guinness rose by 30 percent to N109.1 billion while that of International Breweries grew by 29 percent to 206.8 billion.

Guinness saw its profit surge to N1.3 billion last year from a loss of N12.4 billion in 2020, Nigerian Breweries had a 71.9 per cent increase in profit to N12.7 billion in 2021 from N7.4 billion in 2020. International Breweries reported a loss for the year of N21.6 billion, compared to N17.7 billion.