Brewery giants in Nigeria engage in fierce competition for the lion share of the market, in the face of inclement manufacturing environment
It is a paradox of a kind. At a time many sectors of the economy are underperforming due to the global economic downturn and the debilitating Nigerian operating environment, key brewery companies are awash with cash. The brewery giants are engaged in a fierce competition for the lion share of the industry said to have the greatest potential for growth in Africa. Before now, Nigerian Breweries, NB, and Guinness Nigeria, the two dominant players in the sector, were engaged in a cut-throat competition for control of the nation’s beer market, but the entry of SABMiller, a global brewing giant with headquarters in London, in 2009, changed the face of the competition.
The sector has attracted huge foreign investments, which have enabled the companies to expand their capacity. For instance, Heineken acquired 54 per cent shareholding in NB in 2000 and subsequently invested more than $500 million (about N77.5 billion) in the company to raise its installed capacity, which is now said to be about 12 hectolitres. In 2003, NB acquired its sixth brewery at Ameke in Enugu State, which is one of the biggest in the country. Similarly, it acquired three more breweries in 2011 from its parent company Heineken.
Guinness Nigeria is not left out of the expansion rat race. Its parent company Diageo has spent over N40 billion to expand its Benin and Lagos breweries. It was, therefore, no surprise that in 2008, the Nigerian market for Guinness Stout overtook Ireland, the home country of Guinness, to become the company’s largest market after the United Kingdom, UK.
The consolidation in the industry, which followed the same pattern with the global beer market, is borne out of the competition for industry leadership. Though Guinness and NB are the main players in the beer market, there were, however, other fringe players like Sona Group, Consolidated Breweries, Benue Breweries, Life Breweries, Jos Breweries, International Breweries, Pabod Breweries, Dubic Breweries, Standard Breweries, among many others.
In 2004, Heineken increased its shareholding in Consolidated Breweries from 24 to 50.05 per cent. The Dutch company also bought five breweries from Sona Group, which it later sold to NB and Consolidated Breweries. Not done with consolidation, Heineken also bought Life Breweries. Diageo, the parent company of Guinness Nigeria, on the other hand bought Dubic Breweries for the production of low price beer.
The entry of SABMiller also added another dimension to the consolidation in the Nigerian beer market. After many years of eyeing the lucrative Nigerian beer market, it made an incursion into it in 2009 by buying Pabod Breweries, while also investing in International Breweries. The London-based company is also building a new refinery in Onitsha, Anambra State with a capacity to produce 500,000 hectolitres of beer, which should come on stream before the end of the year. Consequently, the Nigerian beer market is now dominated by three global players; Heineken, through NB and Consolidated Breweries, Diageo, through Guinness Nigeria, and SABMiller.
However, experts insist that NB has about 65 per cent of the market, Guinness about 25 per cent, Consolidated about 10 per cent, while SABMiller has about five per cent. “The consolidation in the brewery sector has indeed been good for the industry, which is now dominated by the three world players Diageo, Heineken and SABMiller. Unlike before when we had many breweries, now we have just three major players and the output now is more than when we had about 25 breweries. Employment in the sector is also more now than before the consolidation,” says Kunle Oyegun, a brewery expert who has over 15 years of experience in the sector.
The performance of the companies in terms of their financials is an indication of how lucrative the industry is. Guinness Nigeria for instance had an operating profit of N26.5 billion on a turnover of N123.6 billion for its 2011 financial year, which was far better than the previous year. In its 2010 financial year, it had an operating profit of N20.7 billion on a turnover of N109 billion. NB fared better. Its turnover and its operating profit for 2011 financial year are N226 billion and N57 billion, respectively. In 2010, it had an operating profit of N44.9 billion on a turnover of N185.8 billion.
However since 2007, a period in which many companies had either shut down or relocated to other countries, Guinness Nigeria’s turnover grew by 99 per cent, while its operating profit has grown by 87 per cent. NB on the other hand experienced a turnover growth of 102 per cent, while its operating profit grew by 109 per cent for the same period. The implication of this is that both Guinness Nigeria and NB have almost doubled their sales since 2007.
But what could be driving the spectacular growth of the sector? Experts point to the return of democracy in 1999. If the return of democracy made the Nigerian brewery sector attractive to foreign investors, the growth of the middle class increased the demand for premium brands. Brands like Star, Gulder, Harp and Guinness Stout became the drink of choice for the growing middle class. Realising the cash cow in this demography, both NB and Guinness Nigeria poured millions into advertising, all in the aim of getting a share of the wallet of the middle class. Not content with advertising, Guinness Nigeria employed entertainment but focused largely on football to get to the middle class. The company at a point became one of the sponsors of the Nigerian Super Eagles and also sponsored some local football teams. The high point of this strategy was the friendly match it sponsored between the Super Eagles and the Argentine national football team, tagged “Guinness the Match.” This strategy proved successful as it created more brand loyalty. “Leveraging on football, Guinness the Match successfully took place creating more consumer loyalty to the brand,” Babatunde Savage, the company’s chairman noted while giving his address at its 61st annual general meeting, AGM, last November at the MUSON Centre, Marina, Lagos State.
NB also opted for the entertainment route to get into the wallet of the middle class. The company came up with the Gulder Ultimate Search reality show and Star Quest, a talent hunt show, among others. It also organised concerts featuring top Nigerian artistes and foreign ones to promote its brand.
The battle for the middle class also led to the production of beer in cans as both companies started canning their premium brands. This further aided the penetration of their products and intensified the competition in the lager and the stout market as well as the malt market. According to industry research, NB controls almost two thirds of the lager market in the country; Guinness places second with about 25 per cent of the market. But in the stout market, Guinness Nigeria is the clear leader controlling about 91 per cent of the stout market.
In a bid to carve a market segment for itself, SABMiller’s has, however, shaken up the low end of the beer market with its low-priced beer. The company, which is listed both on the London and Johannesburg stock exchanges, has been luring those who consume home brewed drinks such as burukutu and pito, into taking its affordable commercially brewed beer. This has heightened the competition in that segment of the market, which was hitherto dominated by Consolidated Breweries, one of the two Nigerian subsidiaries of Heineken. “The presence of SABMiller has made the market more competitive because it has the ability to produce cheap beers from local materials,” says Oladapo Loto, a brewery consultant with over 20 years experience in the sector.
But it appears that both Guinness Nigeria and NB are not willing to let go of the low end of the market. Guinness Nigeria recently entered that segment of the market when it launched Dubic lager beer earlier this year. In the same vein, NB through the three breweries it acquired from Heineken has also entered the market with products like Goldberg lager and Life Continental lager. “All this competition will only benefit the consumers as they will have more variety of products at affordable prices,” says Oyegun.
But beyond consumers having the power of choice, the consolidation and the competition in the industry has been good for the national economy. Aside from the fact that it has attracted foreign investments into the country, it has also been very beneficial to farmers. Farmers of sorghum, cassava and maize have profited a lot from the brewery sector especially with the entry of SABMiller, which makes its beer largely from sorghum. Jobs have also been created due to the expansion in the industry. For instance, the expansion of Guinness Nigeria’s two breweries was estimated to have created over 2000 indirect jobs and 200 permanent jobs. SABMiller’s new brewery in Onitsha is expected to employ 450 people when it comes on stream and works at full capacity.
Guinness Nigeria’s total emolument for its directors and employees was over N7 billion, as indicated in its 2011 financial report, while NB remuneration for its workers was about N17 billion for the same period. “The brewery sector is one of the largest employers of labour in the manufacturing sector while it also pays well,” says Oyegun. Loto foresees that job creation in the sector would continue due to increase in investment in the sector. “Right now, there seems to be capacity issues with some of these breweries and so I expect that there will still be more investment in the sector especially as the migration to can continues,” he says. This could be the reason why Devlin Hainsworth, managing director, Guinness Nigeria, during the opening of the company’s new brew house in Lagos recently, hinted that the company was still eager to invest more in the Nigerian industry. “Nigeria is an exciting and vibrant place to do business, and the increased demand for our iconic brands such as Guinness and Harp requires us to invest in our breweries and infrastructure. Guinness Nigeria is a significant contributor to economic growth through paying taxes to government, generating capital growth and distributing dividends to our many shareholders and creating broad-based wealth through our extensive value chain. We are delighted that we will create a significant number of jobs for Nigerians upon completion of the project,” he said.
Kolawole Jamodu, chairman, NB, while addressing the shareholders at the company’s last AGM, expressed optimism that the company’s acquisition of three additional breweries would put the company on the right stead to capitalise on the growth opportunities in the sector. “Competition has become very intense and is expected to remain so into the year. We are prepared and ready for the exciting times ahead. We have not relented in investing in human and capital assets to enable us compete at the highest level,” he said.
It is not surprising that breweries in Nigeria are making a kill in the face of the downturn in the global economy, when the brewery industry in most countries around the world has taken a tumble as beer consumption has dropped. Indeed, it is expected that more investment will flow into the country’s brewery sector forecast to even grow bigger in the years ahead. Though the country has the second largest beer market in Africa, after South Africa, it is said to have the highest potential for growth.
The country has a huge and growing population of over 160 million people, the largest in Africa. Yet, beer consumption in Nigeria is still relatively low in comparison to the world average. The world average beer per capita consumption is about 27 litres while Nigeria’s beer per capita consumption has been put at 10 litres. South Africa with a population of about 50 million people has a beer per capita consumption of about 63 litres. “There is still room for lots of growth since essentially beer consumption per capita is very low. My current estimate is that the nation’s beer per capita consumption is about 13.5 litres right now compared to a global average of 27 litres,” says Loto.
A report by Vetiva Capital, an investment and research firm, predicts that the volume of beer produced in Nigeria per year would grow from 15 million hectolitres (1.5 billion litres) in 2009 to 23 million hectolitres (2.3 billion litres) in 2015 “based on our estimate, the Nigerian beer market currently sits on an unrealised volume potential of 40 million hectolitres, (four billion litres), representing 170 per cent growth over the current level of 15 million hectolitres. While this potential may not be realised in the short-term, we highlight that gross domestic product, GDP, per capita growth and population build-up are proven fundamentals that we are convinced will drive beer demand to 23 million hectolitres by 2015, representing 54 per cent growth over 2009,” the report says.
With its huge and rapidly growing population, a growing middle class with preference for premium beer, and expanding consumer base, the Nigerian market has become perhaps the most promising beer market on the continent. A research by Renaissance Capital, a leading emerging markets investment bank, named Nigeria as one of the few African markets with a promising beer market. Little wonder the industry has become a great attraction for global players in the brewery sector. Their entry has stimulated a robust competition as each strives to dominate the sector.
The good performance of the brewery giants is sweet music to shareholders of the companies, who have since been enjoying good returns on their investments. Savvy investors like Sunny Nwosu, chairman, Nigerian Independent Shareholders Association, have been reaping bountifully from the stocks of companies in the brewery sector. This investment choice has yielded a pot of gold for him. This is because while the share prices of many companies ranked in the same category with the Nigerian capital market in 2009, that of the brewery sector rebounded quickly and has been growing at a staggering pace. Consequently, investors like him and all those who hold stocks of NB and Guinness Nigeria, have been smiling to the bank.
Though Nwosu was coy about the amount of shares he has in both companies, he, however, concedes that his investment in both companies have been the ace of his portfolio. “The brewery sector is one of the best sectors of the stock exchange. My investment in both companies has given better return than the other ones,” he says. This is no exaggeration. Since 2009 the share prices of NB and Guinness Nigeria have both outperformed the market by a staggering ratio. NB for instance rose from N38 in January 2009 to N107 at the end of May this year, which translates to a growth rate of 182 per cent. This means that a million naira-investment in the company in 2009 would be worth N2.8 million now. In the same vein, Guinness Nigeria also rose from N99 to N224 in the review period. This translates to a growth rate of 126 per cent. Hence, N1 million investment in Guinness in 2009 would be worth N2.3 million. This scenario is what some experts have called money-doubling stocks. However, if the same amount had been invested in the average company in the stock market, which fell by 29.8 per cent in the review period, the value would have fallen to about N700,000, that is a loss of N300,000.
Despite the robust performances of the brewery companies, the sector is faced with some challenges. For instance, Jamodu is not oblivious of the threat that the increasing insecurity in the northern part of the country poses to the brewery sector. He worries that the increasing bomb attacks, which have also targeted beer parlours may affect the bottom line of the brewery sector and the economy as a whole. “No economy can grow and businesses will not flourish in an atmosphere of insecurity,” he said. This might be the reason why Loto submits, “The only thing that can limit growth in the beer industry is if the security challenges continue in the northern part of the country because people will be afraid to go out, let alone go to a beer parlour,” he says.
If the insecurity persists in the northern region breweries and businesses would indeed be affected but the government might end up being the biggest loser. The tax revenue that the government realises from the brewery alone is in no way negligible. Guinness Nigeria and NB contributed N8.2 billion and N18.7 billion, respectively, in taxes last year.
The security challenge, notwithstanding, the sector, it appears, will continue to be attractive to local and foreign investors, even as the various breweries intensify their race for market leadership.