Nigeria: Brewers facing profit cuts on excise duties, naira devaluation

Nigerian brewers are facing a double whammy of excise duties and naira devaluation, which is leading to profit cuts, BusinessDay’s analysis and experts have said.

In Africa’s biggest economy, there are fears that manufacturers of alcoholic beverages which recorded a set of modest gains in their last year’s performances may slip into loss territory as the federal government’s newly revised excise duty rates (taxes) take effect from June this year.

“We expect the brewery industry to come under pressure due to the new excise taxes, cost inefficiencies and naira devaluation,” Abiola Gbemisola, an analyst at FBNQuest said in a note.

“We believe that the taxes could slow production, increase competitive pressures, and force additional increases in prices on beer products,” Gbemisola said, adding that the tax focus on production output rather than sales could stunt the growth of the beer industry as consumers reduce or switch to other alcohol variants.

In a Circular (HMFBNP/MDAs/circular/2023 FP/04) dated 20 April 2023, and signed by former Minister of Finance, Budget and National Planning, Zainab Ahmed, the Nigerian government said N75 per litre will be charged on “beer and stout including all alcoholic beverages and beer not made from malt- whether fermented or not fermented” in 2023, adding that this new excise duty on beer and stout will be increased to N100 per litre in 2024.

“The revised excise duties might wipe out the brewery and other related sectors because they are already dealing with high cost of foreign exchange, high energy costs, transportation, and multiple taxation,” Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, told BusinessDay.

Yusuf said the increased rates would reduce the industry’s revenues and profits, thereby affecting their ability to pay for other taxes like education, company income and value-added tax.

“The brewers that import raw materials and finished goods will see around 40 percent increase on the foreign exchange front because custom has improved their import duty FX rate which will impact brewers on raw materials and finished product,” said Tajudeen Ibrahim, director of research and strategy, ChapelHill Denham.

He said Nigeria brewers will have to increase their product prices in some months to protect their profit margin otherwise they will be recording losses in the coming quarters.

Nigerian brewers increased the prices of their products across different categories from the pandemic in 2020 to 2021 as against the stable price before the pandemic era.

“Based on our market survey, the average price of beer has increased by circa 60 percent between 2019 and 2023, led by the premium beer category, which increased by 75 percent on average. Followed closely are the mainstream category at 58 percent and the value category at 46 percent respectively,” analysts at FBNQuest said in a note.

“We also believe that brewers currently have increasingly limited capacity for further prices,” Gbemisola said, adding that however, consumers have become increasingly self-conscious of their lifestyle choices, which will impact alcohol sales in the future.

The Central Bank of Nigeria on June 14, 2023, collapsed all segments of foreign exchange markets into the I&E window. After trading on Wednesday, the naira depreciated to 770.38 per dollar at the I&E window, the official FX market.

Gbemisola said the devaluation has significant implications for the brewery industry, where companies have substantial reliance on imported raw materials, such as barley, hops, and yeast.

“In addition, the devaluation portends an increase in energy costs and could raise interest expenses, which could pressure margins,” he said.

However, Ayorinde Akinloye, an economic and investment analyst said the impact of naira devaluation on Nigerian Brewers is likely to be minimal. “Most brewers already source their FX needs from the parallel market which has impacted their cost.

“The biggest impact is likely to come from import duties due to the 40 percent upward revision in the customs exchange rate. Thus, while there will be an impact, it is likely to pale in comparison to the level of devaluation in the official exchange rate,” Akinloye said.

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