By Audrey Lotechukwu
FRI, 06 NOV, 2020-theGBJournal-The Nigerian Breweries sector displayed strong double-digit growth in sales and volume in Q32020 despite the strong deterioration in the macro fundamentals including the COVID-19 pandemic, and EFG Hermes Frontier Equity Research sees strong LT upside potential, especially when comparing its current metrics with other more developed markets.
EFG Hermes focused on the performance of Nigerian Breweries (NB) and International Breweries (IntBrew) to make their call given their surprise Y-o-Y performance, respectively, in Q32020, highlighting also their preference for NB in the Nigerian beer sector.
Nigerian Breweries and International Breweries sales grew by 25% and 23% Y-o-Y, respectively, in 3Q20. In addition, margins did not come down and both companies generated FCF. This totally unexpected performance was achieved despite the devaluation of the Naira, rise in unemployment, accelerating food inflation and the COVID-19 pandemic.
The market share split between NB and IntBrew was roughly 65-35% by the end of FY19. The growth in 3Q20 between the two companies was similar, ‘’although the comparable base was softer for IntBrew (sales came down 5% Y-o-Y in 3Q19, while NB’s were flat),’’ according to EFG Hermes.
It is believed both companies have been following the same strategy – increasing the selling price to distributors but keeping recommended retail prices relatively flat. In other words, trying to increase prices, without affecting retail volumes (the pain is paid by the distributors), which might also explain margins showing some resilience.
The Frontier Equity Research said in a note to theGBJournal, that the strong double-digit growth in sales / volumes could continue in the coming quarters.
They ‘’tried to speculate’’ on what might have been the drivers for these results, and explained them by one or a mix of factors.
First, People are travelling less due to the pandemic and this is fueling domestic consumption. Wealthy Nigerians are now travelling less. With the money they would spend abroad, it could buy high volumes of beer in Nigeria (to consume “on” or “off” trade). This part of the population consumes more premium beer, which would explain why volumes are growing and margins are not coming down. Also by travelling less, they are bringing in less alcohol from abroad (i.e. duty free), which is being replaced by domestic consumption.
‘’We remind you that Heineken highlighted that premium segment sales went up by 50% (we believe it is referring to premium beer, but it is not clear in the announcement). We highlight that we have seen a 34% Y-o-Y increase in royalties for NB in 3Q20, while technical management fees increased by 44% for IntBrew, which might confirm our thesis as these are costs paid on premium imported beer.’’
Second, Beer is gaining market share from spirits – this contradicts some of EABL’s and TBL’s feedback that spirits are proving more defensive than beer amidst the pandemic. But we believe that consumers that have not been able to go to clubs/premium bars to drink premium spirits, sort of ‘downtraded’ to premium beer.
We note that Guinness Nigeria’s (GN) sales rose 12% Y-o-Y in 3Q20 (calendar year), significantly below NB and IntBrew.
Third, The ‘average consumer’ buying in bulk on the same budget – by not going so often to bars or even to office to work, the population saves on transport costs. Also by consuming more off-trade, pricing is more affordable (supermarket prices tend to be lower than in a bar). For example, if instead of buying 5 beers, with the saved money, a person buys 6, this represents a 20% increase in volumes.
We note that NB launched an initiative to open several corner shops in almost every area/corner. It has already launched about 1,000 corner shops nationwide and according to our sources, this is helping improve their proximity to consumer (especially in the pandemic context) and fuel volumes.
Fourth, More money is being allocated to drinking vs. other leisure options – despite the lockdown being over, people have more restrictions in terms of leisure options. We would not be surprised that a bigger portion of individuals’ discretionary spending is being allocated to drinking.
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