Nigeria: COVID-19, FX dampen brewery sector’s growth in Q2 2021

A look at the second quarter (Q2 2021) financial performance of Nigeria’s top brewery giants - Nigerian Breweries Plc, International Breweries Plc and Guinness Plc has shown that the spill -over effect of the COVID-19 pandemic amplified the impacts of structural challenges besetting the industry’s operating environment which has left investors counting and lamenting their losses, The Daily Sun reported on August 9.

Before 2014, the major talking point on the industry’s operating environment was the increased attraction of global players such as Heineken and SABMiller, due to years of strong industry profitability performance.

For instance, between 2006 and 2014, the industry’s gross and earnings before interest, taxes, depreciation and amortization (EBITDA) margins averaged 47 per cent and 26.0 per cent respectively. This was made possible by the impressive performance of the broader economy, as annual real GDP growth averaged 6.4 per cent over this period, while the exchange rate (N141.35/$1), the inflation (10.1 per cent) and the unemployment rates (12.1 per cent) supported strong purchasing power of consumers.

However, this trend began to reverse in 2015 when the global crude oil price shock exposed Nigeria’s years of economic mismanagement and external vulnerability. By the end of 2019, the real GDP, the exchange rate, the inflation, and the unemployment rates have deteriorated to 2.2 per cent, N306/$1, 11.4 and 21.3 per cent respectively.

Furthermore, the industry’s gross margin and EBITDA margin (with the exception of International Breweries) fell to 33.5 and 11.6 per cent respectively due to weak growth in consumer demand and accelerated increase of cost lines.

Following additional pressure on sales channels in 2020, due to lockdown measures employed to tame the spread of the pandemic (especially in major commercial cities) and high Inflation rate (average: 13.2 per cent), the industry’s gross margin and EBITDA margin (except International Breweries) fell further to 31.6 and 6.6 per cent respectively in 2020.

The Daily Sun investigations revealed that at the end of 2020, the brewing industry witnessed a rebalancing of market share controlled by the three industry leaders – NB, Guinness, and International Breweries, with a combined 98.9 per cent share of industry revenue.

Further investigations showed that the industry’s profitability declined further in 2020 relative to prior year. Precisely, the industry’s profit before tax (PBT) settled at a negative N30.4 billion (2019: negative N5.7 billion), as Guinness and International Breweries both reported losses of N17.1 billion and N24.9 billion respectively. NB reported N11.8bn PBT in 2020, translating to a 50.4 per cent y/y reduction compared to the prior year’s PBT of N23.4 billion.

Moving to Q2 2021 earnings, data obtained from the Nigerian Exchange Limited (NGX)’s website revealed that out of the three companies under Daily Sun’s review, only Nigerian Breweries had a decent outing in Q2 2021 as its revenue grew by N209.3 billion from N151.8 billion recorded in Q2 2020, profit after tax (PAT) rose by 38 per cent from N5.59 billion to N7.72 billion while PBT grew to N11.35 billion from N8.35 billion in 2020.

However, International Breweries reported loss before tax of N13.66 billion, loss after tax stood at N11.31 billion and its operating expenses grew by N11.27 billion which was driven by marketing expenses (+220 per cent year-on-year) to N4.71 billion during the period. For Guinness, its PBT fell to N1.3 billion from N1.9 billion while its PAT dropped down to N317 million from N1.3 billion in 2020.

Comments from the respective management of the brewery giants revealed that the impact of COVID-19 pandemic on the economy as well as the unstable exchange rate hampered their financial performance while adding that they remain committed to ensuring a strong balance sheet as well as strengthening their market positions.

Although the size and demographic (in beer consuming age) of Nigeria’s population remains a major attraction for brewing business, analysts and operators who spoke to Daily Sun via email chats, noted that the near-term outlook for the industry paints a different picture, given the persistent pressure on consumer wallet and cost of production.

Analysts at Afrinvest, in a report titled: Brewery Sector Update: Resilience at a Snapping Point? said the International Monetary Fund (IMF)’s 2.5 per cent projection of Nigeria’s GDP growth is weak and unless major reforms are implemented, alcohol consumption and earnings will be severely impacted.

“The IMF, in its latest Article IV Consultation report, projected that Nigeria’s GDP growth may settle around 2.5 per cent over the 2021/25 period if major reforms are not implemented, especially regarding dependence on crude oil. This projection is weak for an economy with average population growth rate of 2.7 per cent per annum, as lower GDP growth relative to population growth means more citizens will become impoverished in the coming years.

“Hence, this will have a direct negative impact on alcohol consumption and the earnings of brewery industry players, going forward. Despite Nigeria’s early exit from the COVID-19 induced recession, we maintain a cautious stance on the brewery industry performance outlook in the near term, due largely to the persistent systemic risk factors and weak economic growth projections which will have direct impact on consumer spending and production cost”.

Also speaking, the Chairman, Issuers and Investors ADR Initiative (IIADRI), Moses Igbrude, said the brewery sector is facing a potential implosion with intense competition, harsh economy, unfavourable government policies and changing taste of consumers.

He argued that with inflation skyrocketing and a harsh operating environment hitting hard on disposable income of consumers, the industry would likely remain depressed amid a rather gloomy economic outlook and urged the government to reduce taxes for the sector and urged industry operators to shun unhealthy competition and under-pricing to avoid more depletion of revenue.

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