Nigerian Breweries and Guinness Nigeria struggle – is excise duty to blame?

Heineken subsidiary Nigerian Breweries has seen Q1 2019 profits fall by 21.3% after the federal government introduced a new excise duty regime for alcohol. Guinness Nigeria is also flagging what it calls a “difficult operating environment”, especially for lager.

Under the old system, wine, beer, spirits and tobacco attracted a 20% ad valorem tax. VAT and import duties came in on top of that. Beer and stout attracted a N0.30k per centilitre (Cl) tax in 2018 and 0.35k per Cl in 2019. This means that a 33Cl bottle of domestically brewed beer attracts N11.55 of tax in the new regime in 2019, compared to a 20% ad valorem tax under the old regime.

Heineken is partly blaming the new excise duty for its poor performance. Revenues are actually up in Q1 from N88.5bn ($245.7m) in the same period in 2018 to N91.4bn ($261.3m). But the amount of excise duty the company pays rose from N5.5bn ($15.3m) to N8.1bn ($22.5m).

But the broader issue is inflation, rather than strictly tax: in Q1, Nigerian Breweries’ cost of sales increased from N45bn ($124.9m) to N48.2bn ($133.9m). Heineken has noted that Nigerian Breweries’ “Cost of Sales increased by 7.3% primarily driven by raw materials and consumables while Marketing and Distribution expenses increased 7.9% over the same period in 2018.”

As such, profit before tax fell to N11.5bn ($31.9m) from N15.3bn ($48.5m). In other words, the rise in excise duty accounts for about half of the fall in profits.

At face value there is a similar picture at Guinness Nigeria. For the quarter to 31st March 2019, revenue declined by -3.78% to N33.6bn ($93.3m) from N34.9bn ($96.9m) in same period in 2018. Profit before tax fell by 43.46% to N2.45bn ($6.8m) compared to the same period last year. however, unlike Nigerian Breweries, the cost of sales was flat.

Commenting on the results, Nigeria CEO Baker Magunda said, “in the quarter ended 31st March 2019, Guinness Nigeria delivered results which reflect the continued difficult operating environment. While lager remains a challenged sector, Guinness and spirits recorded considerable growth, and our non-alcoholic malt drinks grew in the face of intense competitive pressure.”

It is interesting that spirits has grown so strongly: The Distillers and Blenders Association of Nigeria (DIBAN) vocally opposed the new tax on alcohol, and estimated that the new regime would increase taxes by 500%, from an average of N30 to N150. For premium spirits brand owners such as Diageo, Guinness Nigeria’s parent company, the tax increase is trivial. A bottle of Smirnoff vodka can already cost N4,000.

Overall, both sets of results show that while growth is back in the premium sector, value consumers are struggling with inflationary pressures – food price inflation in Nigeria is above 13% year on year – and their impact on disposable income.