Brewing industry suffering from excessive raw material costs

The brewery industry is now facing severe cost pressure as prices of local raw materials rise astronomically undermining their backward integration strategy.

Industry stakeholders said the cost pressures coming from sorghum, wheat and others would remain elevated, driven by the impact of rising inflation, insecurity across agricultural belts in the country as well as other macroeconomic challenges.

The brewers had embraced a backward integration strategy to help them save money against imports due to exchange rate volatility.

However, the strategy has now started failing with local raw materials expenses by leading brewers increasing 113.6 per cent to N188.0 billion at the end first quarter of 2024, Q1’24, from N88.0 billion a year earlier, Q1’23, and the industry interim reports have indicated further rises in Q2’24 with no respite projected for this year.

Industry experts are now worried that the failure of the policy would lead to a return of massive importation of raw materials despite the foreign exchange implication.
This development, they also believe, amounts to another blow to Nigeria’s industrialization and employment generation.

Meanwhile, Vanguard findings have also shown that under the rising cost pressures, the top four leading Nigeria’s breweries resorted to bank loans to support cash-flow thereby accumulating credits amounting to N812.7 billion in the first quarter of the year, Q1’24.

The amount indicates almost 29 percent increase in borrowing quarter-on-quarter.

Financial information from the four leading manufacturing companies listed on the Nigerian Exchange Limited, NGX, shows that the finance cost (interest on borrowing) jumped by 191.2 percent to N125.5 billion in Q1’24 from N 43.1 billion in the corresponding period of 2023, Q1’23.

The affected companies are Nigerian Breweries Plc, Guinness Nigeria Plc, International Breweries Plc, and Champion Breweries Plc.

Commenting on the challenges facing the manufacturing sector in general, Chairman of Dangote Group, Alhaji Aliko Dangote raised the alarm over the latest interest rate of 30 percent which came at the backdrop of the hike in Monetary Policy Rate, MPR, as announced by the nation’s apex bank, the Central Bank of Nigeria, CBN, saying that it is detrimental to businesses in the country, adding that manufacturers cannot cope with it.

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According to him, “But as all of us can testify, our manufacturing sector has declined over the years, and has largely failed to provide the jobs it was expected to create for our teaming youths. It has also increasingly lost the strong linkages it once had with our agricultural and mining sectors which, if it had continued would have resulted in increasing food security, and energy self-sufficiency.”

However, despite the hike in the price of their products, there has not been respite yet for the industry as cost of sales and economic hardship escalates resulting in huge losses recorded by major brewers both in the full year 2023 and in the Q1’24.

The rising inflation, declining purchasing power, naira depreciation coming along with scarcity of foreign exchange, hike in petrol prices, and higher tariff for electricity, among others, have compelled the brewery industry to increase the prices of their products to remain afloat.
But the industry analysts fear that the product price hikes imposed by the breweries may further reduce the demand for the products.

Losses
Meanwhile, the challenges have led the brewers to a combined loss after tax amounting N169.7 billion in the Q1’24, a massive 1034 percent rise from N14.9 billion recorded in the corresponding period of 2023, Q1’23.

In the Q1’24, the brewery industry recorded a combined Foreign Exchange, FX, loss of N272.9 billion, indicating a mind-blowing 1342 percent rise from the N18.9 billion they recorded in Q1’23, largely induced by the impact of the devaluation of the naira on their foreign exchange transactions from raw materials among others.

Also the industry’s cost of sales soared by 250.9 percent to N278.5 billion from N79.3 billion in Q1’23, while the net finance cost soared by 616.1 percent to N191.2 billion from N22.7 billion in Q1’23.

Increase in price of products

Nigeria’s inflation as of May this year stands at 33.95% according to National Bureau of Statistics, NBS. The brewery sector players are responding to this, by raising the price of their products.

Vanguard’s finding has shown that major brewery companies listed on the Nigerian Exchange Limited, NGX have raised prices of their products either directly or indirectly more than three times in one year and some twice in the first half of this year.

For instance, International Breweries Plc has raised the price of its products two times this year. Just, in April this year, the company announced that its product price would increase with effect from June 1, 2024.

The notice, which was signed by its District Manager, West, Mr Hans Darfour, noted: “All orders created in the system before 23:59 hours of February 29, 2024, will be charged at the current prices.

“All invoices issued by (or after) 00:00 hours of March 1, 2024, will have the new prices, without any exceptions.

“The price on the invoice will depend only on the time and date of invoicing, regardless of when the order was placed. “We urge all our business partners to follow this price chain to keep up with the excellent sales growth in past months and, at the same time, maximise your profits.”

Guinness announced a notice for its increment titled, “Price increase by Guinness Nigeria Plc – Selected Brands,” signed by its Commercial Director, Mr. Olusanya Adesanya, stating: “Following the prevailing economic realities which have impacted significantly on the costs of our production materials and cost of doing business, this is to inform you that we plan to take a price increase on selected Stock Keeping Units, SKUs in our Beer and MSS category.

“This new price structure will be effective from Wednesday, March 13, 2024, and further details will be communicated subsequently.”

Nigerian Breweries Plc approved a second price change in February, 2024 according to information from sources close to the firm.

International Breweries said it has increased prices of its various product offerings in Nigeria. The brewer said in a statement that reviewing prices in its portfolio has become necessary due to current market realities, and was done to serve its customers better.
Head of Sales of the company, Olaleye Abimbola, disclosed that it is confident that the decision to review the prices benefits all its partners.

Fallouts
In response to the difficult operating environment, Nigerian Breweries indicated plans for a company-wide re-organisation as part of a strategic recovery measure.

A letter signed by Nigerian Breweries’ Human Resources Director, Grace Omo-Lamai, and sent to the leadership of the National Union of Food, Beverage & Tobacco Employees (NUFBTE) and the Food Beverage and Tobacco Senior Staff Association (FOBTOB), stated that its proposed plan would include a temporary suspension of operations in two of its nine breweries. As a result, and by labour requirements, the company invited the unions to discussions on the implications of the proposed measures.

Commenting, Managing Director/CEO of Nigerian Breweries Plc, Hans Essaadi said: “We recognise and regret the impact that the suspension of brewery operations in the two affected locations may have on our employees. We are committed to limiting the impact on our people as much as possible by exhausting all options available including the relocation and redistribution of employees to our other seven breweries, and providing strong support and severance packages to all those that become unavoidably affected. We are also committed to supporting our host communities in ways that ensure they continue to feel our presence.”

Guinness Nigeria Plc, in Q1’24 recorded a loss after tax of N56.4 billion, and FX loss of N 37.0 billion.

Analysts’ comments
Analysts at Cardinalstone Research, while commenting on Guinness’s performance said: “We expect cost pressures to remain elevated, driven by the impact of rising inflation on locally sourced raw materials (e.g. sorghum) and foreign exchange volatility on imported products, notably the international premium spirits portfolio. Given that raw materials make up over 50.0% of the cost of sales, we envisage a compression in gross profit margin to 32.0% in full-year 2023/24 as against 34.1% in full-year 2022/23.”

Reacting to the development in the brewery industry, Clifford Egbomeade, Economy and Communications expert, said: “The poor performance and losses in the brewery industry in Nigeria can be attributed to various factors. One major challenge is the intense competition in the market, with several local and international players vying for a share of the market.

“The industry has also been affected by the harsh economic climate in Nigeria, which has led to a decline in consumer purchasing power and a shift towards affordable alternatives. Moreover, the industry has been impacted by the increase in excise duties and taxes, which has raised production costs and forced some brewers to increase prices. The industry has also been affected by the ongoing forex crisis, which has made it difficult for brewers to access foreign exchange to import raw materials and equipment.

“Unfortunately, some brewery companies in Nigeria might face closure or consolidation due to the challenging market conditions. Already, some breweries have begun to downsize or halt production, leading to job losses and economic hardship for affected communities and citizens alike.

Commenting also, David Adonri, analyst and Executive Vice Chairman, High Cap Securities Limited, said: “Their fortunes worsened after the government floated the Naira last year as many of them suffered FX losses that caused their balance sheets to become negative. Also, due to galloping inflation that had eroded the purchasing power of consumers and the high cost of production which has priced their products out of the reach of many consumers, the profitability of brewing companies has evaporated.

“Many consumers can no longer afford drinks manufactured by breweries. Due to consumer resistance, many traders in brewed drinks are suffering from loss of income. The quantum of tax that the government usually collects from breweries can no longer be assured. Many direct and indirect jobs have been lost due to the crisis in the brewery industry. The overall impact on the economy is the decline of the contribution of the industry to GDP.”

In his recommendation, he said: “ To avoid shutting down, many breweries are trying to re-capitalize to boost their working capital and extinguish short-term liabilities. IB Plc is currently running a Rights Issue while NB Plc is expected to hit the capital market very soon to raise capital. The breweries understand the huge potential of the Nigerian market and are determined to weather the storm. They know that the challenges are temporary and that their businesses will boom again when the economy rises to the new price level.”