Beverages manufacturers may hike prices to cushion new excise duty, competition

Manufacturers of alcoholic beverages and carbonated drinks may have a tough time trying to manage their revenue margin, following plans by the Federal Government to review excise duty on such drinks, while struggling with growing competition and weak consumer demand.

Having raised excise duty for alcoholic beverages and tobacco to reduce health hazards, the federal government announced last month that it was working on modalities to increase Value Added Tax on some carbonated drinks and beverages like Coke, Pepsi, and energy drinks may be affected.

Minister of Finance, Zainab Ahmed, stated this at the inauguration of the Strategic Revenue Growth Initiative.

Ahmed said the federal executive council will take a request to the National Assembly for an amendment of the VAT law.

For operators in the beverages sector, review of their results in the last quarter of 2018 showed that their growth was affected by an excise tax increase that was not passed on to consumers during the year.

Competition in the carbonated drinks sector is expected to become more intense with the introduction of the new tax as operators jostle for an already saturated market.

Big players may witness increased loss in market share with consumers seeking cheaper alternatives.

For instance, Nigerian Breweries had announced last year that it would assuage the impact of increase arising from the excise duty, which ought to be transferred to consumers, by intensifying its cost-saving measures.

With pressure on its balance sheet, NB’s management may be forced to raise prices this year – even at the expense of volumes – to protect margins.

Similarly, International Breweries’ (IB) expansion into the south-west region also challenged the earnings of NB Plc, even though IB’s earnings to date remain under pressure due to thinning margins and a high leverage.

For Nigerian Breweries, net sales were down by -4% y/y during the quarter, while PBT declined by -43% y/y, largely driven by a -348bp contraction in gross margin to 37.3%.

The results are reflective of a decline in sale volumes due to stronger competitive headwinds, cost input inflation, and an increase in taxes following a change in the excise duty regime.

For Guinness Nigeria, performance in its Q2 2019 was reflective of inflationary cost pressures – that could not be passed on – and an unfavourable excise tax regime.

The results also suggest that Guinness was hit hardest by competitive headwinds in the lager market (70% of the beer market), while efforts are consolidated in the spirits market.

Guinness posted PBT and PAT declines of -27% y/y and -17% y/y to N2.6bn and N1.7bn respectively in Q2 2019. The key driver behind these was a gross margin contraction of -483bps y/y to 29%.

This contraction more than offset a significant increase in other income, and declines in opex (-10% y/y to 8.7bn) and net interest expense (-17% y/y to N413.8m).

Presently, Nigeria is facing a huge fiscal challenge to meet up with infrastructural development as the population continues to grow.

The finance minister said the increase in excise duty will help the government in providing infrastructure for its people.

“There will be a VAT increase. During the course of 2019, we will have clarity as to which items and what the rate will be and we will have to take a request to the National Assembly for amendment before it takes effect,” she said.