Brewing Industry Faces Severe Cost Pressures Due to Rising Raw Material Prices
The brewing industry is experiencing significant financial strain as the cost of local raw materials skyrockets, undermining their backward integration strategy.
Industry experts highlight that the cost pressures from sorghum, wheat, and other materials are expected to remain high, driven by rising inflation, insecurity in agricultural regions, and other macroeconomic challenges.
Brewers had adopted a backward integration strategy to mitigate the impact of exchange rate volatility by reducing dependency on imports. However, this approach is now faltering, with expenses on local raw materials for leading brewers surging 113.6% to N188.0 billion in Q1 2024, up from N88.0 billion in Q1 2023. Interim reports indicate further increases in Q2 2024, with no relief in sight for the year.
Industry analysts are concerned that the failure of this policy may lead to a resurgence in raw material imports, despite the foreign exchange implications. This development poses another setback for Nigeria’s industrialization and job creation efforts.
Additionally, Naija traffic findings reveal that the top four Nigerian breweries resorted to bank loans to support cash flow, accumulating N812.7 billion in credit in Q1 2024, marking a nearly 29% increase in borrowing from the previous quarter.
Financial data from the four leading breweries listed on the Nigerian Exchange Limited (NGX) shows that their finance costs (interest on borrowing) jumped by 191.2% to N125.5 billion in Q1 2024, compared to N43.1 billion in Q1 2023. The affected companies are Nigerian Breweries Plc, Guinness Nigeria Plc, International Breweries Plc, and Champion Breweries Plc.
Alhaji Aliko Dangote, Chairman of Dangote Group, expressed concern over the latest interest rate of 30%, following the Central Bank of Nigeria’s hike in the Monetary Policy Rate (MPR). He warned that this rate is detrimental to businesses, making it difficult for manufacturers to cope.
He stated, “Our manufacturing sector has declined over the years, failing to provide the jobs it was expected to create for our youth. It has lost the strong linkages it once had with our agricultural and mining sectors, which could have led to increased food security and energy self-sufficiency.”
Despite raising product prices, the brewery industry continues to suffer, with cost of sales and economic hardships escalating, resulting in significant losses for major brewers in both the full year 2023 and Q1 2024. Rising inflation, declining purchasing power, naira depreciation, foreign exchange scarcity, higher petrol prices, and increased electricity tariffs have compelled the industry to hike product prices to stay afloat. However, analysts fear that these price hikes may further reduce product demand.
In Q1 2024, the brewers recorded a combined loss after tax of N169.7 billion, a massive 1034% increase from N14.9 billion in Q1 2023. The industry also experienced a combined foreign exchange loss of N272.9 billion, a 1342% rise from N18.9 billion in Q1 2023, largely due to the naira’s devaluation affecting their foreign exchange transactions for raw materials and other expenses.
Additionally, the industry’s cost of sales soared by 250.9% to N278.5 billion from N79.3 billion in Q1 2023, while net finance costs increased by 616.1% to N191.2 billion from N22.7 billion in Q1 2023.
Nigeria’s inflation rate stood at 33.95% as of May, according to the National Bureau of Statistics (NBS). In response, brewery companies have raised their product prices multiple times this year. For instance, International Breweries Plc announced a price increase effective June 1, 2024, while Guinness Nigeria Plc and Nigerian Breweries Plc have also implemented price hikes.
In response to the challenging environment, Nigerian Breweries plans a company-wide reorganization, including temporarily suspending operations in two of its nine breweries. The company is in discussions with unions about the implications of these measures.
Guinness Nigeria Plc reported a loss after tax of N56.4 billion and a foreign exchange loss of N37.0 billion in Q1 2024.
Analysts at Cardinalstone Research predict continued cost pressures due to rising inflation and foreign exchange volatility. Clifford Egbomeade, an economic and communications expert, attributes the brewery industry’s poor performance to intense competition, economic challenges, increased excise duties and taxes, and the ongoing forex crisis. He warns that some brewery companies in Nigeria might face closure or consolidation due to these conditions.
David Adonri, Executive Vice Chairman of High Cap Securities Limited, notes that the breweries’ fortunes worsened after the government floated the naira, causing FX losses and negative balance sheets. He points out that many consumers can no longer afford brewery products, leading to decreased demand and loss of income for traders.
To avoid shutdowns, many breweries are seeking to re-capitalize to boost working capital and settle short-term liabilities. International Breweries Plc is currently running a Rights Issue, while Nigerian Breweries Plc is expected to raise capital soon. Despite the challenges, the breweries remain determined to weather the storm, recognizing the long-term potential of the Nigerian market.
