Brewing Industry Struggles with Surging Raw Material Costs

The brewing industry is grappling with skyrocketing costs of local raw materials, challenging their backward integration strategy. Sorghum, wheat, and other essential ingredients have seen substantial price increases due to rising inflation, agricultural insecurity, and broader macroeconomic issues.

The brewers initially adopted a backward integration approach to mitigate the volatility of exchange rates. However, this strategy is faltering as expenses for local raw materials soared by 113.6% to N188.0 billion in Q1 2024, up from N88.0 billion in Q1 2023. Projections indicate further increases in Q2 2024, with no immediate relief in sight.

Industry experts fear that this failure may force brewers back to large-scale importation of raw materials, exacerbating Nigeria’s foreign exchange challenges and impeding industrialization and job creation efforts.

Recent findings reveal that leading Nigerian breweries have resorted to bank loans to maintain cash flow, accumulating N812.7 billion in debt by the end of Q1 2024, a 29% quarter-on-quarter increase. Financial data from the top brewing companies—Nigerian Breweries Plc, Guinness Nigeria Plc, International Breweries Plc, and Champion Breweries Plc—shows that finance costs surged by 191.2% to N125.5 billion in Q1 2024 from N43.1 billion in Q1 2023.

Alhaji Aliko Dangote, Chairman of Dangote Group, criticized the recent 30% interest rate hike announced by the Central Bank of Nigeria, warning that it could severely impact business operations in the country. He noted that the manufacturing sector has been declining, failing to generate expected employment and losing its vital linkages with agriculture and mining.

Despite raising product prices, the brewery industry continues to struggle, recording significant losses in both full-year 2023 and Q1 2024 due to rising production costs and economic hardships. The combined after-tax loss for brewers hit N169.7 billion in Q1 2024, a 1034% increase from N14.9 billion in Q1 2023. Foreign exchange losses also soared to N272.9 billion, up 1342% from N18.9 billion in Q1 2023, driven by the naira’s devaluation.

As inflation reached 33.95% in May, breweries have raised product prices multiple times within a year. Companies like International Breweries Plc and Guinness Nigeria Plc announced price hikes in early 2024 to cope with escalating production costs.

In response to the challenging environment, Nigerian Breweries plans a company-wide reorganization, including a temporary suspension of operations in two breweries. Managing Director/CEO Hans Essaadi emphasized efforts to minimize employee impact through relocations and severance packages.

Guinness Nigeria Plc reported a Q1 2024 loss after tax of N56.4 billion and a foreign exchange loss of N37.0 billion. Analysts predict sustained cost pressures due to inflation and forex volatility, expecting a gross profit margin compression to 32.0% for the full year 2023/24.

Experts like Clifford Egbomeade and David Adonri attribute the industry’s poor performance to intense competition, economic challenges, increased excise duties, and the forex crisis. They warn that some breweries might face closure or consolidation, leading to job losses and reduced economic contributions.

To combat these issues, breweries are seeking to recapitalize. International Breweries Plc is running a Rights Issue, and Nigerian Breweries Plc is expected to follow suit. Despite the current challenges, industry leaders remain optimistic about the market’s potential, aiming to weather the storm and thrive once economic conditions improve.