Breweries on the Brink

The unfavourable business environment that is prone to exchange rate volatility, rise in input costs and declining purchasing power are pushing brewers on the brink, writes Dike Onwuamaeze

It is not strange in Nigeria to witness the death of an entire industrial sub-sector. It happened to the tyre manufacturing industry when the likes of Dunlop, Michelin and Odutola tyres seized operations and folded up. It also happened in the paper manufacturing sector where all the paper mills are today moribund and not producing. The same process is being witnessed in the nearly extinguished textile manufacturing sector. These industrial closures exposed Nigeria to total reliance on importation for these essential products. No thanks to the dire operating environment.

Now, it appears that this trend is creeping into the breweries sub-sector, where operators are faced with the grim choice of swim or sink.  A report that was published by Afrinvest in April disclosed that three major brewers that are listed on the Nigerian Exchange (NGX), namely Nigerian Breweries Plc, International Breweries Plc and Guinness Nigeria Plc, booked historic pre-tax losses of  N254.8 billion in 2023 financial year. The report also projected that the industry’s volume of sale would contract further in 2024 by 2.7 per cent.  The report, which foresaw a mixed bag of boom and gloom, said that the prevailing weak fiscal capacity of the nation would made it compelling for the federal government to remain aggressive with taxation to meet part of its growing expenses.

“On the back of this reality, we do not rule out the possibility of a further upward review in the excise charge on alcohol, wines and spirits products later in the year, given that the 2022-2024 excise roadmap would be due for review by mid-year,” it said.

 Recently, the interim Chairman of Nigerian Breweries Plc, Mr. Sijbe Hiemstra, revealed that firms in the brewery sub-sector suffered a volume decline and erosion of profitability leading to an unprecedented combined pre-tax loss of N266 billion amongst the main players in the sub-sector. He attributed the huge loss to the revaluation of outstanding foreign debts and payables to overseas partners in the face of the current devaluation of the Naira. 

The sub-sector, like other industry, is encompassed with difficulties in the Nigerian operating environment. For them, 2023, and even the first quarter of 2024, was a period of unprecedented challenges and uncertainties.

Disruptions in economic activities

It began with disruptions in the economic activities and widespread hardship caused by the currency (Naira) redesign policy of the Central Bank of Nigeria (CBN) in early part of 2023. The policy caused severe shortage of Naira that led to nationwide liquidity crisis with severe impact on social, economic, productive activities and a contraction of many critical sectors of the economy. This was coupled with the tension and uncertainties that went with the 2023 general elections in the country.

The environment was worsened in the middle of 2023 by the floating of the Naira to allow the market forces to determine the country’s exchange rate and the removal of fuel subsidies that resulted to over 300 per cent increase on the price of petrol. These had huge impact on the cost of transportation, energy, and other utilities as well as drastic reduction in purchasing power of Nigerian.  

Also, the brewed products’ market was also confronted with massive increase in excise duty rates and introduction of other taxes on alcoholic beverages and single use plastic. However, the administration of President Bola Ahmed Tinubu has suspended the implementation of the new rates and taxes.

To survive the harsh business terrain, brewers in the country were constrained to resort to series of price increases on almost monthly bases, even bi-weekly in some cases. In March this year for instance, the Guinness Nigeria Plc informed its distributors at least two times that it would be increasing the prices of its products. The first announcement was done on March 6 while the second price increases was announced on March 31.  On March 31, 2024, that it has reviewed the prices of its products upward. The notices were signed by the Acting Commercial Director, Guinness Nigeria Plc, Mr. Olusanya Adesanya, who explained that, “this is due to the prevailing economic realities which have impacted significantly on our current cost of doing business.”

Similarly, the International Breweries Plc, announced its price increases on Thursday, February 29, 2024, and on Monday, April 1, 2024. It said: “We write wishing the best for you, and your business. Due to escalating costs impacting our business, we decided to review prices in our portfolio.” The Nigerian Breweries Plc also recorded three rounds of price increases in February, March and April 2024.

So far all these upward reviews of prices have not helped operators in the brewery sector to recover their cost and declare profit. Most of them are robbed of their profitability at the foreign exchange end of their economic activities.

Recently, Hiemstra, the board chairman of NB Plc, shared his organisation’s experience with shareholder. He said: “We were nevertheless able to deliver organic net revenue growth by a high-single-digit of 9.0 per cent while maintaining our leadership position in the market due to a strong performance by the premium brands led by Heineken, efficiency measures and price adjustments. However, the margins contracted significantly as input price costs, mainly caused by inflation, commodity price and foreign exchange devaluation persistently rose faster than the price adjustments.

“Our revenue grew from N551 billion in 2022 to N600 billion in 2023 while the operating profit declined by 15 per cent from N53 billion in 2022 to N45 billion in 2023 due to higher input cost and one-off reorganisation cost, despite strong and aggressive cost savings and  other efficiency measures. However, the company recorded a net loss of N106 billion during the year primarily due to the impact of the devaluation of Naira, which resulted in foreign exchange loss of N153 billion, and higher interest costs on loans and borrowing for capacity expansion.”

The result was that “no interim dividend was declared in the 2023 financial year and no final dividend was proposed” to the shareholders of NB Plc.

Crisis Galore

 The Guinness Nigeria Plc also suffered the same experience. Guinness’ operating profit surged by 27 per cent, reaching N22.21 billion. This was enabled by the strong revenue performance and intensified drive for productivity across the organisation despite extreme inflationary tensions.

However, Guinness Nigeria Plc suffered significant unrealised foreign exchange losses amounting to ₦81 billion. This was attributable to the continued devaluation of the Naira, closing the quarter at N1,351/$1.   

For now, the Nigerian Breweries have announced that it would shut down two plants while the Guinness disclosed last year that it would outsource the sale of its imported brands to newly registered companies.

How far these strategies would improve the fortunes of firms in the brewery industry is a matter of conjecture for now.

However, economists that spoke to THISDAY pointed out that price increases were not limited to operators in the brewery industry but a trend that cut across all segments of the economy.

A former Professor of Economics at University of Benin, Professor Mike Idi Obadan, told THISDAY that brewers are making their prices to reflect the movement in the exchange rate.

Obadan said: “I think what they are trying to tell the world is that their cost of production is increasing reflecting the depreciation of Naira in the exchange rate. Their cost of production is going up as a result of many factors like increase in the cost of inputs, energy prices, exchange rate, and electricity’s tariffs besides major legacy factors like terrible roads, bad road network, which contribute to their high cost of distribution.

“The business conditions are not favourable. I will also mention interest rate because that is a major factor. Cost of borrowing has gone up in line of CBN’s deliberate policy. Multiple taxes are still there and so on. These are the major cost push factors that affect the prices of products.”

He noted that major factors affecting their cost of production of deteriorating. That is the reason they are constrained to jack up their prices in spite of the fact that they have very elastic demand. The demand for beer is very elastic.

Obadan warned that products with very elastic demand may not be able to continue in production if their costs of production keep going up. “They are likely to be pushed out of the market. The sector is going down and our policy makers do not seem to appreciate this,” he said.

Macroeconomic Environment

Speaking in the same vein, an Economist and Founder of Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said that the breweries are part of Nigerian macroeconomic environment and are affected by what other businesses are experiencing.

Yusuf said: “The difference here is that they are making their own announcement of price review public or that they are communicating it formerly. There are many that do not communicate their price reviews formally. You just get to the market and found out that prices have been increased. Maybe it is their own culture to formally communicate price increases.

“If they will have their way they will not increase their prices because they are in a highly competitive and elastic market. It is a last resort. If you see any business where there are competition increasing prices you will know that they do not have choice.”

According to him, the brewers do not have the chance to reduce the quantity and quality of their products like other manufacturers of fast moving consumer products.

Moreover, the multinational firms in the brewery industry do not have the flexibility of sourcing their inputs from cheaper Asian markets rather than Europe. 

“The procurement system for so many of them is centralised. So rather than going to source inputs from China and other cheaper markets, they stick to their approved suppliers to maintain their unique international quality and standard, which they do not compromise on.

“And because of their link with their parent companies that provides their supplies that exposure to foreign exchange losses is extremely very high.

“When a business is struggling to survive, it may rationalize its operations, lay off staff and increase the price of its products as much as possible so that it can recover its costs.

“It is a survival strategy but it is only time that will tell whether that will save them or not because people may begin to drop the bottles and their sales will begin to drop.

“It depends on how much they will be able to recover in terms of costs and how much decrease in sale they are able to absorb,” Yusuf said.