New Beer Prices Threaten Relaxation

As Nigerian Breweries Plc bows to the pressure from the current harsh operating environment by increasing prices of some of its products beginning this week, there are concerns that the business decision will not only trigger similar actions from other beer producers, but it will also rob Nigerians of what is perceived as the last vestige of enjoyment in a difficult time like this, writes Festus Akanbi

A strong indication emerged last week that alcoholic beverage consumers in Nigeria may look for alternative means of satisfying their appetite for beer as the leading beer producing company in the country, Nigerian Breweries, announced an increase in the prices of some of its products effective this week.

Market watchers said the price increase has also robbed Nigerians of a veritable source of comfort and relief in a difficult time unleashed by the fuel price hike and the attendant rising cost of living.

The decision to raise prices is attributed to several factors that have put immense strain on the Fast-Moving Consumer Goods (FMCG) industry.

Analysts from Nairametrics noted that with inflation reaching 22.79% in June and the managed float of the forex market leading to the naira exchanging for as high as N869/$ at the I&E window recently, companies like NB PLC have faced significant challenges.  

However, there is fear that as the leading player in Nigeria’s brewing industry, Nigerian Breweries’ actions are closely watched by competitors and may set a precedent for price adjustments within the sector.

Market watchers said the demand-supply dynamics in the beverage market will also come into play, with competitors facing similar cost pressures and possibly making similar decisions. 

Half Year Performance

Nigerian Breweries had announced revenue of N277 billion for the half-year (six months) ended June 30, 2023.

According to the unaudited and provisional results for the period which was recently filed with the Nigerian Exchange Limited (NGX), the company recorded a marginal growth in the revenue compared to the N274 billion recorded in the corresponding period in 2022.

A statement signed by the Company Secretary/Legal Director, Uaboi Agbebaku, revealed that the half-year results were majorly impacted by the devaluation of the naira which led to revaluation of foreign exchange obligations and higher input costs. Other factors were the effect of petroleum subsidy removal on consumers, a one-off redundancy exercise cost, and the impact of the cash crunch that hit the country in the first quarter of the year. As a result, the company recorded an escalated loss after tax of N47 billion in the half-year as against a Profit After Tax (PAT) of N19.08 billion in the same period of 2022.

Agbebaku explained that despite the impact of these challenges, the company recorded a more than 100% increase in its Quarter 2 operating profit versus the corresponding period in 2022, driven mainly by pricing, focus on premium products, as well as strong and effective management of cost by the company. The Quarter 2, 2023 operating profit was also an improvement on the Quarter 1, 2023 operating profit.

Explaining the reasons behind Nigerian Breweries’ latest price adjustment, analysts pointed out that the company, in its half-year financial results reported N70.6 billion in forex losses as of June 30, 2023. Coupled with rising production costs and the ever-increasing cost of raw materials, this is said to have created a challenging financial environment for the brewing giant.

Industry Performance

An analysis of the performance of the brewery industry showed that in the first quarter of 2023, the industry faced significant challenges as operating expenses and the cost of sales experienced losses.

Reports showed that Nigeria Brewery, Guinness Plc, International Brewery, and Champion Brewery recorded a dip in profit, declaring a loss of N10.225 billion in the first quarter of 2023 compared to a gain of N21.35 billion recorded in the same quarter of 2022.

For instance, in the first quarter of 2023, the Nigerian brewery industry faced a significant setback as finance costs recorded a substantial loss, resulting in a dip in profitability. The finance costs surged by 118.4 per cent, reaching a loss of N12.11 billion compared to N4.88 billion in the same period of 2022.

Market analysts said the primary driver behind this surge in finance costs was the increase in interest expenses on borrowing. The industry witnessed a rise in interest rates due to continuous adjustments by the Central Bank of Nigeria. As a result, breweries faced higher interest expenses, contributing to a substantial increase in finance costs.

 In the same period, the brewers reported an increase in operating expenses, amounting to N66.22 billion, compared to N49.983 billion recorded in the same period of 2022.

Another downside was the cost of sales which recorded a loss, growing by 9.91 per cent to N162.2 billion in the period under review, compared to N147.57 billion recorded in the same period of 2022. Furthermore, the brewery industry experienced a decline in revenue during the first quarter of 2023.

Revenues contracted by 6.02 per cent, amounting to N234 billion compared to N249 billion recorded in the same period of 2021. This decline in revenue added to the financial challenges faced by breweries, further impacting their profitability.

Succumbing to Harsh Operating Environment

Operators blamed the persistent rise in operating expenses on the challenging operating environment in Nigeria which manifested in the prevailing highly inflationary environment, devaluation of the naira, and high energy prices, explaining that these external factors put pressure on the industry’s profitability, leading to increased costs across the board.

According to reports, the brewing industry, which relies heavily on cash flow to manage day-to-day operations and fund strategic initiatives, has been particularly affected by the cash crunch. Brewers faced constraints in purchasing raw materials, and paying suppliers, among other critical financial obligations.

The overall slowdown of the Nigerian economy and currency devaluation have further impacted profitability across various industries, including brewing. 

There is no doubt that with the price increase set to take effect this week, consumers will begin to feel the impact of the new price regime in bars, clubs, and other centres of social activities.

Already grappling with challenging economic conditions and stretched disposable incomes, consumers may find themselves compelled to cut back on their beer consumption or seek more affordable alternatives.

Market analysts said it will be difficult to quantify the sheer number of people who will feel the impact of the current turmoil in the beer market. He listed wholesalers, retailers, clubs, joints, and organisers of social events.

“It is not rocket science that the new price regime will affect consumption. We are in a period where people find it difficult to eat three square meals. Beer consumption is a luxury that many people can deal with. When sales drop, owners of clubs and drinking joints will be forced to close down, a development which will certainly worsen the current job situation in Nigeria,” an industry analyst said.

As brewers push prices of some of their products up, there are concerns that it will not only affect their sales, but it will also rob Nigerians of what is perceived as the last vestige of enjoyment in these difficult times.