NIGERIA – A change in strategy by Nigeria’s dominant brewers has intensified competition in the sector.
Nigerian Breweries (NB), the country’s largest brewer by market value, and Guinness Nigeria (GN) are the dominant players who are adjusting to the fluid alcoholic beverage market.
“GN had previously been happy to concentrate on the premium segment, leaving the value segment and the mainstream to NB; however, consumers’ low spending power has prompted GN to change tack,” said Omair Ansari, SSA breweries analyst at Renaissance Capital, in an August 27 note.
“Historically, advertising spend amounted to around 5 percent of revenue, but we see this increasing in the future, as competition intensifies among the three largest brewers.
NB has a larger distribution network and is more efficient from a cost perspective than GN, and we do not believe this will change. We believe GN will experience a pick-up in costs as it attempts to regain lost market share,” he said.
Ansari added that with the proposed consolidation of NB and Consolidated Breweries, NB would retain its dominant position in the market place, accounting for close to 70 percent of market share.
“Nigeria is our largest brewery operation in Africa and second-largest in the world after Mexico,” Jean-Francois van Boxmeer, chief executive officer of Heineken (the major shareholder in NB), said in an interview with BusinessDay.
“We are the market leader for decades and have been investing ahead of the curve. If you are too cautious, you can miss the boat,” he said.
Competition is increasing in the sector as consumers continue to get squeezed by the aftermath of the increase in fuel pump prices of 2012.
Prices in Nigeria are 40 percent higher than those in Indonesia and 90 percent higher than those in India, on a purchasing power parity basis, according to a recent report by McKinsey.
High food prices, reflecting poor agricultural productivity, are a major driver of high costs.
Inflation for July 2014 rose to 8.3 percent, according to data from the National Bureau of Statistics (NBS).
Food purchases take up 74 percent of poor urban Nigerians’ income, hence beer consumption is still expensive for the majority of Nigerians.
Competition is coming not just from within the brewing sector, with other forms of beverages eating away at market share as disposable income grows.
This has already been felt with spirits, with volume growth for this segment being in the triple digits for certain brands, according to Renaissance Capital.
Per-capita consumption of spirits is minimal, at only 0.3 litres pa in 2013, leaving significant room for growth, while margins are also more lucrative than in beer, both in the premium segment and in the mainstream, according to Ansari.
“From a low base, we believe growth rates of close to 20 percent pa are feasible in the short-to-medium term,” Ansari said.
The Nigerian beer market has historically been a duopoly, with NB and GN dominating the landscape. SABMiller, however, joined the market through its 2012 acquisition of International Breweries.
SABMiller saw double-digit lager volume growth in Nigeria in FY14, underpinned by 23 percent volume growth in its Trophy lager brand, while Hero lager volumes more than doubled as the firm increased capacity at its Onitsha brewery.
There has also been a recent boom in the Nigerian bitters market, which is now estimated at over N32.2 billion ($200 million) annually, according to management at Ghanaian Kasapreko.
Rencap has a HOLD on Nigerian Breweries target price (TP) N187 and a SELL on Guinness Nigeria TP N164.
“The operating environment remains tough with the consumer under pressure and price elasticity extremely high. The winner in such an environment will always be the brewer that can marry good distribution with affordable quality products, hence our preference for Nigerian Breweries,” Ansari said.