Scorecard: Guinness, Nigeria’s limping brewing giant

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Guinness Nigeria Plc, the second largest brewer in Nigeria has been swimming in turbulent waters, battling dwindling sales and declining profits in the last five years.

From the available recent financial data, Guinness Nigeria Plc certainly is not having a smooth ride in recent times, though the management of Nigeria’s premier brewery has continued to paint a rosy picture of its financials.

Guinness’ recent number is burdened by poor performance. Revenue has sustained mixed performance (2.12%, -3.03, -10.83%, 8.51% ) from financial year ended (FYE) 2012 to 2015 even as profit after tax continues to bleed (fell 18.7%, 19.14%, 19.30%, and 18.58% from FYE 2012 to FYE 2015 in a row) due to higher financial charges, operating expenses and cost disadvantages compared to major competitors.

Market survey suggests that a number of factors accounted for this sustained lacklustre performance, including complex and competitive operating environment, slowing premium segment growth, and slowing discretionary spending as well as Guinness’ pricing review among others.

Guinness Chart
Guinness Chart

New Development
However, in other to salvage the company from present predicament, Diageo Plc, parent company of Guinness Nigeria Plc has embarked on management restructuring that has seen it change its chief executives three times within just eight months.

Recalled that Guinness relieved Seni Adetu’s appointment as its Managing Director after two and half-years in that position and appointed John O’Keefe, an Irish, as replacement in November 2014.

Adetu was said to have been shoved aside, allegedly because Guinness Nigeria Plc results had been poor since he became Managing Director.

Yet, it appeared that the taunted Midas Touch of O’Keefe could still not perform the Irish magic in Nigeria. Like Adetu, O’Keefe was replaced by Soren Lauridsen effective July 2015.

With less than six months in the saddle, there are no justifiable reasons to believe that trouble times are over yet.

Seni-Adetu
Seni-Adetu

But then, consciously of not being caught completely napping, Diageo is carefully mapping out strategies that will give it unassailable control over the brewing giant.

In a statement in September 2015 said, it has informed the Board of Directors Guinness Nigeria and also notified the Nigerian Stock Exchange of its intention to increase its equity stake in Guinness Nigeria to 70 percent from its present 54.3 percent equity holding.

Financial Performance
In its results for the full year ended June 2015, Guinness Nigeria Plc, recorded a 8.51 percent year-on-year growth in revenue to N118.5 billion ($59.8 million) compared with N109.2 billion in 2014. This was the first growth since 2012.

It would be recalled that the company revenue declined from N126.3 billion in June 2012 to N122.4 billion in 2013 and down to N109.2 billion in 2014.

In our opinion, the improvement in revenue was due to the benefits of successful products innovations launched in the previous year such as Orijin Bitters and Orijin Ready-to-Drink and the change in leadership.

On a quarterly basis, the company’s revenue of N33.75 billion in the fourth quarter June 2015 improved by 14.5 percent and 8.2 percent compared with N29.5 billion and N31.2 billion respectively in the third quarter to March 2015 and the fourth quarter to June 2014.

Guinness Chart
Guinness Chart

However, Guinness Nigeria Plc full-year net income fell 19 percent to N7.8 billion ($39 million) as weaker economic growth hurt consumption of pricier beer brands in the continent’s most populous country.

The slump in profit came as Nigeria suffered from lower crude prices, with government revenues declining and public sector workers going unpaid for months. Economic growth was 2.4 percent on an annualized basis in the second quarter, down from 6.5 percent a year earlier.

“Following the challenging macro-environment and the squeeze on household wallets, growth in the mainstream segment has been constrained, with more growth seen” among Guinness’s cheaper brands, Tunde Abidoye, a Lagos-based analyst at FBN Capital Ltd., said in a recent research note.

Cost to sales ratio

Guinness chart
Guinness chart

According to the Guinness audited report, 5-year average cost to sales ratio for the beer company stood at 65.1 percent.

Common size analysis of the major player in the industry indicates that Nigerian Breweries (NB) holds cost leadership 146.6 percent 5-year average cost to sales compared to Guinness 65.1 percent 5-years average cost to sales.

The above mentioned recent development in Guinness Nigeria Plc is expected to create a platform for improved efficiency and economies of scale resulting from the streamlining of operations, cost savings from increased efficiency in procurement, supply chain management and support functions are expected to ultimately enhance shareholder value.

Profitability

Guinness Chart
Guinness Chart

New Mail Nigeria Online research estimated Guinness net profit-margin 5-year average at 10.23 percent. Return on Equity (ROE) averaged 28.8 percent in five years.

Cursory look at the year under review showed that both net profit margin and ROE stood at lowest five year.

We also noticed that both indices have been on downward trend since 2011. Net profit margin dropped from 14.5 percent in 2011 to 11.6 percent in 2012, 9.7 percent in 2013, 8.8 percent in 2014 and 9.11 percent in 2015. Similarly, ROE fell from 44.5 percent in 2011 to 16.12 in 2015.

Market Share
The Nigerian brewing space can be approximated as an oligopolistic-duopoly, with two major players controlling about 90 percent of the market, while other fringe players control a thin margin of the market.

Nigerian breweries, without mincing words, is the biggest player in the sector with a total installed capacity of 15.4mhl, 61 percent volume share. Guinness Nigeria Plc is the second biggest player with 5.5mhl installed brewing capacity and 27 percent share, while other players like International breweries Plc (0.5mhl), Champion Breweries and JOS Breweries are among the fringe players with 5.0 percent market share.

Guinness
Guinness

Liquidity
Another area that the management of Guinness Nigeria Plc needs to improve on is its assets quality. This is because both current and quick ratios fall short of common rule of thumb.

Though, a review of the industry showed a similar trend among other players in the sector. The current ratio which expresses the relative relationship between current assets and current liabilities of Guinness stood at average of 0.89:1 in five years.

Similarly, Quick ratio (acid -test ratio) which measures the debt-paying ability of a company also shows that the company would not be able to meet its financial obligation as when due.

Quick ratios of Guinness stood at average of 0.53:1 in five years while it stood at 0.49:1 in 2015. All fell below 1.5:1 minimum value for a company with strong assets base.

Soren Lauridsen
Soren Lauridsen

Conclusion
Analysis of the beer market trends in Nigeria linked this performance drags to extreme rivalry in the sector, likely market cannibalism, slowing premium brands growth and sustained soft discretionary spending.

In all, the propose 70 percent takeover stake in Guinness Nigeria Plc by Diageo plc and recent management reshuffle should keep them at arm length with other players in the industry in term of financial ratios.

In the words of Babatunde Savage, Chairman, Guinness Nigeria Plc, change in leadership is expected to improve the company’s fortunes.

“We have had an encouraging year so far and we believe that we are in a position to finish well in spite of the challenges of the operating environment.

“Recent changes in our management with the arrival of Soren will only further strengthen the pool of seasoned experience we have to help us implement our strategy to win in the market place,” Savage said.

For now, it’s yet to be seen how the changes would positively impact on the fortunes of Guinness.

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