Macro headwinds impact profits of brewery giants

Brewery giants in Nigeria have faced a challenging third quarter, with rising input costs, exchange rate fluctuations, and inflation impacting their profits. Despite reporting higher revenues, companies like Nigerian Breweries and Guinness have seen a loss in earnings due to these macro headwinds. Oluebube Nwosu, Consumer Goods Analyst at Vetiva Capital, shed light on the financial performance of these companies in a recent interview with CNBC Africa. Both Nigerian Breweries and Guinness, key players in the market, have experienced significant improvements in their top-line revenues driven by price increases. The rise in prices, reflecting higher input costs and FX devaluation, has helped boost their top-line growth. However, the companies are treading a fine line between raising prices to cover costs and maintaining demand from consumers. Nwosu emphasized the importance of striking a balance to retain customers even during challenging times. Finance costs have also increased, especially for Nigerian Breweries, due to their debt profile. To address this, the companies are focused on fundraising to ease their financial burden and improve their bottom line. While passing on price increases to consumers has been relatively smooth, the sustainability of this strategy remains a concern amidst ongoing FX issues and market volatility. In a bid to reduce dependency on foreign exchange, breweries are ramping up local sourcing of raw materials. While full backward integration may take time, incremental increases in local sourcing can significantly save on FX expenses. This temporary solution aims to alleviate the financial strain on the companies in the short term, with a long-term goal of achieving a substantial percentage of local sourcing. When discussing the earnings outlook, Nwosu highlighted that Guinness is still a buy at its current trading price, with FX losses expected to decrease in subsequent quarters. Maintaining market share and navigating through the current challenges are crucial for long-term sustainability. Nigerian Breweries, on the other hand, has experienced fair investor reaction, with some positive momentum observed around the rights issue announcement. Despite the tough operating environment, all three major players in the industry, including International Breweries, are implementing unique strategies to address the common challenges. While Nigerian Breweries and International Breweries focus on addressing debt obligations through fundraising, Guinness has divested a majority stake to a local entity to mitigate FX risks. During this period, companies are adopting a maintenance approach rather than aggressive expansion plans to conserve cash for core operations. Capex spending has slowed down in line with revenue considerations. With Nigerian Breweries on track to possibly exceed a trillion in revenues and Guinness nearing the 500 billion mark for the full year, the forecast for dividend yield remains optimistic post-recovery. Looking ahead, breweries in Nigeria are cautiously optimistic about their financial performance, with a concerted effort to weather the current challenges and emerge stronger in the long run.