The casual, social and sometimes addictive interest in alcoholic beverages does not necessarily translate to a hearty appetite in the stocks of firms that produce them. Afterall, you could have a liking for variants of Guinness beer like the popular small and big stout, but care less about what is happening with the company’s bottom-line and stock price. This is understandable, as there isn’t necessarily a direct connection between the love for a product and an interest in the company producing it. Nonetheless, in a game of “ifs”, would you consider buying a part of the company that produces your favorite alcoholic beverages?
An industry in distress
Despite maintaining a robust population size somewhere north of 200 million with roughly half of the population falling above the 18-year legal age limit set for alcohol consumption, the Nigerian brewery industry remains in deep waters, as the macro weakness has formed a mixture of some sort with some structural difficulties in the industry, which together have made for a very distasteful cocktail likened to the operating environment of the brewers. Narrowing down to the specifics, the economy comes with its own baggage, notably, the vulnerability caused by Nigeria’s exposure and dependence on the volatile black gold and the ensuing FX challenges, the untamed nature of our inflation, the weak real GDP growth and the soaring unemployment level. There is no need flogging the dead horse on this, as the cracks in our economic structure are as clear as day. However, on a more distressing note, the industry has suffered from the tepid growth in consumer demand which derived from weak growth in disposable income and consumer spending. This somewhat generic problem has particularly stifled the sector, as alcohol remains a discretionary consumer item that is very sensitive to reductions or moderations in consumer income and spending. This is evidenced by data from the National Bureau of Statistics (NBS) which revealed that consumers spent the least on alcoholic drinks at ₦150.2 billion, representing 0.4% of total consumption expenditure in 2019. This occurred against a backdrop of a sustained moderation in consumer disposable income.
The brewers have also been at the receiving end of some other specific challenges, as players in this space are blighted by the upsurge in some expenditure line items. Particularly, the incremental excise duties introduced by the government in 2018 has impeded their performance.
Also, the brewery industry has an oligopolistic structure, with three major players (NB, Int. Brew., and Guinness) all stifling each other out in the race for market share growth and retention. This has limited the brewers’ ability to pass down the burden of higher production costs to their consumers.
Covid-19 makes everything worse
The pandemic was only an aggravating factor behind the downward spiral of the performance of the brewery sector in 2020, as the companies in this space already had problems that weighed on their financial performance. Nonetheless, the pandemic tugged the performance of brewers further southwards, as restrictions placed on movements, gatherings and businesses lowered the commercial consumption of alcoholic beverages.
Buffetism or Speculation
Warren buffet once noted that the best holding period for a stock is “forever”, and that is one rationale to pick up one or more of the brewery names given the downside risks that continue to remain predominant. While the long-term forecast appears gloomy, there could be some utility in picking up some stocks in the brewery space on expectations that our population size would soar as high as 401 million by 2050 (as forecasted by the United Nations), the cost pressures would ease, and the general economic condition would improve. This might sound like overly optimistic expectations, but they could become reality in the distant future.
Elsewhere, an investor could just return to some good old-fashioned speculation, regardless of what the fundamentals dictate. Make no mistake, this could be rewarding, as brewers like Guinness have recorded a year-to-date performance of 57.89% this year.
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