August 12, 2020 / 01:20 PM / By Afrinvest Research / Header Image Credit: Beverage Daily
Against the backdrop of Nigeria's fragile macroeconomic environment, the brewery sector performance have remained pressured despite a robust population advantage estimated at over 200 million people. Our analysis of the sector reveals that industry revenue grew by a CAGR of 5.1% between 2017 and 2019 to N594.3bn from N511.8bn. Notwithstanding, the sector is not out of the woods yet as intense competition still presents limited scope for volume growth while the impact of regulation and higher cost pressures continue to weigh heavily on the overall performance. Equally, macroeconomic fundamentals are little changed in favour of consumer spending in the face of persistent weak economic growth, currency pressures, and higher unemployment & inflation rates. Notably, data from the NBS shows that consumers spent the least on alcoholic drinks at N150.2bn, representing 0.4% of total consumption expenditure in the last decade. This is not unexpected given the poor state of consumer's disposable income with a slow CAGR of 1.7% in the last five years as well as the discretionary nature of alcohol consumption.
While Nigeria's large population and strong demographic appeal are some of the key industry growth propellers, we note that the sector is still faced with tough fiscal regulations including the June 2018 new excise duty burden on beer, wines and spirits as well as the new VAT rate of 7.5% implemented in February 2020. Likewise, external risk factors mainly lower oil prices are also constraints to FX capital flows for the importation of essential raw and packaging materials such as barley and aluminum cans. Meanwhile the insecurity issues in the Middle-belt region still persists, upsetting the supply of locally sourced raw materials such as rice and sorghum, thus threatening brewer's backward integration strategies with added cost pressures. Given these changing dynamics and the limited room for pricing, brewers have been compelled to actively seek to improve efficiency across the value chain through backward integration as well as to retain and increase market share through brand visibility. Observably, as the battle for market share deepens, industry players continue to leverage product innovations to remain competitive in the face of constrained pricing actions. Nigerian Breweries for instance, launched a new "45cl Legend Extra Stout" in 2019 - a variation of the popular Legend Stout (originally in 33cl and 60cl bottle sizes) while GUINNESS introduced two (2) new products in the premium lager segment - "Guinness Gold" and "Baileys Delight" (a variation of its popular Baileys Cream liquor) - and one (1) in the spirit segment, "Orijin Herbal Gin".
As at FY:2019, the market structure of the Nigerian brewery industry is still oligopolistic with four (4) major listed players - Nigerian Breweries Plc (NB), International Breweries Plc (INTBREW), Guinness Nigeria Plc (GUINNESS) and Champion Breweries Plc (CHAMPION). However, in our analysis, we focused on 3 of the 4 listed brewers noting that NB maintained dominance as the largest brewer with a coverage market share by revenue of 54.3%, INTBREW trailed, accounting for 22.3% and displacing GUINNESS as the second largest brewer while GUINNESS now accounts for 22.1% of coverage market share by revenue.
Overall, we note that growing volumes and improving profitability remains a tight rope to walk especially in the wake of the COVID-19 pandemic. We believe short term growth triggers are limited considering the devastating impact of the pandemic on consumer's income. Therefore, we suspect the trend of increased product offerings especially at the mainstream and value segments of the market as well as targeted marketing and advertising strategies would be sustained over the short to medium term. In addition, despite the recent drive to boost local supply of raw materials, brewers remain largely dependent on importation, still accounting for over 40.0% of raw material components on the average. Meanwhile increased competition has strongly restricted the scope for pricing actions to support margins due to cost pressures, fragile consumer spending and shifting consumer preferences. Thus, we now expect the response to FX devaluation and COVID-19 economic shocks to largely influence pricing decisions in the industry as consumers' disposable income takes a hit.
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