Lagos, Nigeria — The brewery industry in Nigeria is currently grappling with severe cost pressures as prices of local raw materials soar, undermining their previously effective backward integration strategy.
Industry stakeholders attribute the persistent cost hikes in sorghum, wheat, and other essential materials to rampant inflation, widespread insecurity in agricultural regions, and other macroeconomic challenges.
The backward integration strategy, adopted by many brewers to mitigate the financial risks associated with importation due to exchange rate volatility, is now proving insufficient.
According to industry reports, local raw material expenses for leading brewers surged by a staggering 113.6 percent, reaching N188.0 billion by the end of the first quarter of 2024 (Q1’24), compared to N88.0 billion in the same period the previous year (Q1’23).
Projections indicate that these costs will continue to rise throughout the second quarter of 2024 (Q2’24), with no immediate relief in sight.
Industry experts express concerns that the faltering policy will inevitably lead to a resurgence in the massive importation of raw materials despite the adverse implications of foreign exchange. This shift is seen as a significant setback for Nigeria’s industrialization efforts and its goal of generating employment.
Vanguard’s investigation reveals that, under the weight of escalating cost pressures, the top four breweries in Nigeria have turned to bank loans to sustain cash flow, resulting in accumulated credits amounting to N812.7 billion in Q1’24. This figure represents an almost 29 percent increase in borrowing on a quarter-on-quarter basis.
Financial data from the leading brewing companies listed on the Nigerian Exchange Limited (NGX)—Nigerian Breweries Plc, Guinness Nigeria Plc, International Breweries Plc, and Champion Breweries Plc—shows that finance costs, including interest on borrowings, soared by 191.2 percent to N125.5 billion in Q1’24, up from N43.1 billion in Q1’23.
The Chairman of Dangote Group, Alhaji Aliko Dangote, voiced his concerns over the recent interest rate hike to 30 percent following an increase in the Monetary Policy Rate (MPR) announced by the Central Bank of Nigeria (CBN).
Dangote emphasized that such high interest rates are detrimental to businesses across the country, warning that manufacturers are struggling to cope with the financial burden.
Industry stakeholders stress that the brewery sector’s reliance on local raw materials was initially a strategic move to reduce costs and stabilize operations amid fluctuating exchange rates.
However, the combined effects of inflation, insecurity, and macroeconomic instability have severely impacted this strategy. As the cost of locally sourced materials continues to climb, breweries are facing tough decisions regarding their operational and financial strategies.
The potential return to large-scale importation of raw materials poses a significant threat to the industry’s sustainability. It could lead to higher production costs, reduced profit margins, and increased prices for consumers.
Additionally, the reliance on imports may exacerbate the country’s foreign exchange challenges, further straining the economy.
In conclusion, the Nigerian brewery industry is at a critical juncture, facing unprecedented cost pressures that threaten the viability of its backward integration strategy.
Stakeholders urge the government and relevant authorities to address the underlying issues of inflation and insecurity in agricultural regions to stabilize the supply chain and support the industry’s growth. Failure to do so could result in severe repercussions for Nigeria’s industrialization and employment landscape.
This article was created using automation technology and was thoroughly edited and fact-checked by one of our editorial staff members
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