Beer Monopoly

 

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Posted June 2008

Nigeria - Hope springs eternal

Think of selling beer in a hot country where most people live on less than two dollars a day and you will understand that there’s something going on when beer consumption drops more than 60 percent and then starts to rebound. 

No matter how hard I looked, I could not find the sign. I mean, this was Lagos airport. There should have been the sign. Billboards promoted mobile phones and other paraphernalia of modern life. Obviously, they had forgotten to place the sign somewhere prominently. I craned my neck. The sign was nowhere to be seen.  How was I to heed the sign’s warning? “THROUGH ME THE WAY TO THE CITY OF WOE, / THROUGH ME THE WAY TO EVERLASTING PAIN, / … ABANDON ALL HOPE, YOU WHO ENTER HERE.”

I felt like Dante. Curious. Somewhat apprehensive but undaunted. After all, wasn’t I about to enter Nigeria, Africa’s most populous country and also one of the world’s most dangerous and corrupt? Wasn’t Lagos one of the world’s hot spots for violent crime, like Johannesburg or Luanda, where everybody carries a gun or has at least some bodyguard with him who sports a riffle? Take a look at any guide-book, or listen to your friends talk and, frankly, you'd think twice about coming here.

You might. I didn’t. When the opportunity offered itself, I gratefully accepted it.

Yet I was checking the airport’s arrival hall for the sign. Of course, I was not seriously expecting the sign to be there. The sign adorns the gate to hell – or so the Italian poet Dante Alighieri claims in his Divine Comedy (1308-1321), one of Europe’s early literary masterpieces, which describes Dante's journey through the three realms of the dead over the Easter Triduum in the spring of 1300.

According to Dante, the gluttonous, the avaricious, the sullen, slothful and the violent, the treacherous and the corrupt, false prophets, thieves, and counterfeiters – all have their own circle of hell where they suffer pain and eternal damnation.

Reading reports on Nigeria, especially those written by wide-eyed, clean-faced young American journalists who, for some reason, always make Lagos their port of entry if they visit Africa for the very first time, you cannot help thinking that they must have swatted their copy of the Divine Comedy on the flight over. Because how can it be explained that their travels and travails in Nigeria invariably resemble Dante’s journey through hell and purgatory? Why do they customarily encounter “things unknown to man./ Now sighs, loud wailing, lamentation / resounded through the starless air, /… . Unfamiliar tongues, horrendous accents, / words of suffering, cries of rage, voices / loud and faint, the sound of slapping hands -- / all these made a tumult, always whirling / in that black and timeless air, /as sand is swirled in a whirlwind.” Mind you, thus spoke the great poet Dante some seven centuries ago and not some 21st century fresh-out-of-college hack with too much idealism and too little experience.

If you think Lagos Dante’s hell, then all of Africa’s cities are hell. But just as Dante thought hell the other of paradise, so Lagos is a mix of good and bad, laughter and crying, hopefulness and despair. I saw a pauper without feet, most likely a migrant from the north and victim of one of Sharia law’s harsher punishments, crawling up to a large Jeep to knock at the window and beg for money. He smiled.

What is perhaps unique to Lagos is that it manages to exude an all-pervasive evangelical religiosity and an all-penetrating corruption all at the same time. The city’s Christian churches may awe you with their football-stadium giantess and ostentatious piousness. Yet the houses in the wealthy northern suburbs, which have written on them “Beware of 419 – this house is not for sale” to ward off scamsters (“419” refers to Nigeria’s penal code section on fraud), leave you wondering to what extent the people’s desire “to make it” in this life tends to override their sense of right and wrong. As said, Lagos is both good and bad, yet it is never black or white or comes in shades of grey. No. Lagos is all colours, smells, noise, hustle and bustle – a testament to the human desire to reach for more even in the face of opposition and fear.

*

Those must have been the days in the 1970s when it seemed like nothing could stop Nigeria’s beer consumption from going up. Commercial beer production started in 1949 when Nigerian Breweries (NBL), today majority-owned by Heineken, established its first brewery in Lagos. Local competition began to heat up in the 1960s when four more breweries were built, the Guinness brewery among them. However, this never stopped imported beers from being very popular. Beck’s, Bergedorf (the former export brand of Hamburg’s Holsten brewery) and Heineken were much sought after.

The popularity of imports had two effects: It made local brewers strife for a high quality of their own beers and it alerted the Nigerian government to the fact that imports represented a significant amount of local consumption. As profits from beer imports did not end up in their coffers and required precious foreign currency, the government in the mid 1970s decided to ban the import of beer outright, thus kicking off the construction boom in breweries which culminated in 27 plants on stream in 1980.

However, as Nigeria’s moves towards a market economy have been thwarted at various times, it was individual state governments that footed the bill for these new breweries with their oil sector revenues (80 percent of government revenues). Many of these breweries have been floated on the Nigerian stock market since, yet until recently foreign investors were prevented from majority-owning them.

According to analysts at the U.S. Department of State, “the oil boom of the 1970s led Nigeria to neglect its strong agricultural and light manufacturing bases in favour of an unhealthy dependence on crude oil. Oil wealth, the concurrent decline of other economic sectors, and a lurch toward a statist economic model fuelled massive migration to the cities and led to increasingly widespread poverty, especially in rural areas. A collapse of basic infrastructure and social services since the early 1980s accompanied this trend. By 2002 Nigeria's per capita income had plunged to about one-quarter of its mid-1970s high, below the level at independence.”

Over the years beer consumers would feel the pinch. Jobst Meier zu Biesen remembers that while in the 1970s an average Nigerian worker had to toil for two hours to afford a beer, twenty years later he had to toil for two days.

Various civilian and military governments have dabbled in the economy through import restrictions. In the 1980s, the military government of General Babangida decided to ban the import of cereals. A declining purchasing power coupled with a not-so-exciting beer quality caused beer consumption to drop dramatically: from an estimated high of 12 million hl in 1986 to less than 5 million hl in 1994 – and that included about one million hl of the non-alcoholic malt beverage. The 1980s and 1990s were a hard time for brewers because sorghum, far from being a “cheap” local solution, made beer very costly to produce. As the import ban was fairly wide-ranging Germany’s Brewtech, out of necessity, decided to branch out into rice farming and rice milling. Mr Meier hoped that by manufacturing a food staple they could provide much needed jobs in the countryside and persuade the government to grant them an import licence for brewery equipment. That strategy was eventually abandoned because subsidised rice imports priced local rice out of the market.          

Between 1986 and 2006, says the World Bank, the Nigerian economy (GDP) has increased more than fivefold to reach USD 115 billion in 2006. Annual GDP growth averaged 4.5 percent between 1996 and 2006 and is forecasted to rise to 6.8 percent per year until 2010. Annual inflation which peaked at 30 percent in 1996 has dropped to 8.2 percent in 2006. Although most Nigerians (144 million or 125 million depending on your sources) live in abject poverty, the rise in urban population (currently 50 percent) and their access to higher incomes has allowed brewers to widen their customer base and increase beer volumes. As with most African countries, per capita consumption figures don’t mean much because the number of Nigerians who do not drink alcohol, be they Muslims, evangelical Christians or women, is high. Therefore, those who drink alcohol are either frequent or heavy users. 

*

Heineken’s involvement in Nigerian Breweries (NBL) dates back to the 1940s, when the Dutch brewer as one of the minority shareholders helped launch what is today Nigeria’s most popular beer brand, Star. In the 1970s, NBL introduced Gulder. Legend Stout and the non-alcoholic malt beverages Maltina and Amstel Malta completed NBL’s portfolio for many years. It was only in the early 2000s that Heineken switched from importing its flagship brand to locally producing it.

Nigeria has often been cited as the textbook example of the Heineken model of “going international”: the move from minority stakeholder to majority owner in sync with consumption increases. Whether this is really true in the case of Nigeria is open to doubt. After all it has taken Heineken more than 50 years to become the major shareholder of NBL. Waiting for so long cannot have been all voluntary as until recently legislation prevented foreigners from owning Nigerian companies. Yet, in an effort to attract foreign investment, President Obasanjo changed the law so that in 2000 Heineken could convert a loan of EUR 71 million to NBL into 11 percent of NBL’s equity, which finally gave Heineken a 54.2 percent stake in the brewer.

In an effort to consolidate its number one position in the Nigerian market, Heineken has also pursued NBL’s smaller competitor Consolidated Breweries, which brews “33” Export and Hi-Malt. Heineken obtained a controlling stake of 50.05 percent in 2004. The acquisition price was never disclosed.

In 2007, says Heineken, both breweries enjoyed a combined market share of 66 percent (NBL 56%, Consolidated Breweries 10%) and sold 8.4 million hl of beer. Brauwelt estimates that this includes their malt volumes too.

No doubt, NBL is a profitable enterprise. During the past financial year ended 31 December 2007, NBL raised its turnover 29 percent to NGN 111.7 billion (EUR 612 million) over 2006 and its profit before tax 70 percent to NGN 27.8 billion (EUR 152 million). Profit After Taxation (PAT) stood at NGN 18.9 billion (EUR 103 million) in 2007, up 74 percent from 2006. At the end of May 2008, NBL had a market capitalisation of NGN 381 billion (EUR 2 billion)

Generally, the return on investments (ROI) in Nigeria is among the best in both the emerging markets and the world at large. At the January 2008 Economist Fourth Business Roundtable with the government of Nigeria, participants averaged Nigeria's ROI at 35 percent, making it the highest in the world. Between 2000 and 2007 Brauwelt estimates that Heineken received a total dividend payment of EUR 149 million at today’s value. Add to that Heineken’s technical assistance fee and royalties (3 percent of turnover according to industry standards), plus the profits from Heineken’s sales of raw materials to NBL and you can see why Heineken does not want to bray out to the world how important NBL is to Heineken’s bottom line, lest the Africans should start wondering why beer in their country has to be so expensive.

*

On our way to the city’s beverage market in an area called Apogkon, traffic was reasonably heavy which allowed the young hawkers to peddle their wares to the people trapped in their cars. As we sat and waited for our vehicle to move, the world and its offerings walked past our window. Kitchen clocks, sun glasses with – probably – counterfeited Dolce & Gabbana labels, biscuits, soft drinks, trousers, baseball caps, milk in cans, newspapers, tea towels, DVD racks for Nollywood movies (Nigeria is home to the world’s third largest movie industry, hence Lagos is called Nollywood), socks and nail clippers. By the side of the road people sold passport photographs and snacks, repaired some mechanical parts and cut hair. Despite their industriousness and eagerness, most of them will call themselves lucky if at the end of the day they will have made more than one dollar.

Lagos has over 350 official markets - either specialist markets for certain products or general markets which house more than 1000 stalls and where you can buy almost anything. The beverage market near the old Lagos port is somewhat unique. It has an old mosque at its centre. Which begs the question who came first: the Muslim worshippers or the Christian traders selling alcohol from stalls surrounding the mosque. Short of space, the market has already spilled over to a dual carriageway. For several hundred metres beverage stalls line the dual carriageway, from which rises a flyover. In order to cram more stalls into the area, hawkers have also set up shop under the flyover, even right under its lowest part where a grown-up can only crouch. It’s from there that they sell all kinds of beverages: local beers, soft drinks, imported beers, wines, unrefrigerated yogurt drinks, foreign spirits and, you would not believe it, champagne in magnum bottles.

Traditionally, trading in Nigeria has been done by women. With Lagos being the country’s business hub it’s not surprising that an estimated 40 percent of all consumer goods sold in Nigeria go through Lagos women’s hands first. Thanks to their excellent informal information system, prices don’t vary at all from stall to stall. Indeed, changes in price will be uniformly adopted within minutes to maintain margins, which are, for example, NGN 100 (EUR 0.55) on a carton of Harp (Guinness’ lager brand) and NGN 200 to NGN 300 (EUR 1.65) on a carton of Heineken.

When I visited the market in March, prices were as follows: a carton of Heineken (12 bottles) cost NGN 2500 that’s EUR 1.14 per bottle, a carton of either Star or Gulder NGN 1500, that’s EUR 0.68 per bottle. A carton of Guinness Foreign Extra Stout would set you back NGN 3300 (EUR 1.50/bottle) and 12 bottles of Harp NGN 1200 (EUR 0.50/bottle). Price comparisons are not made easy for the consumer as Heineken is sold in 600 ml bottles and Guinness Extra Smooth (EUR 1.04/bottle) in 450 ml bottles.

Guinness Malta, the non-alcoholic malt beverage, costs NGN 125 (EUR 0.68) per bottle and thus appears to be cheaper than a bottle of Coke which costs NGN 190 (EUR 1.04). But the consumer has to bear in mind that with Coke he gets 500 ml whereas with Maltina he has to quench his thirst on 330 ml.   

If the Apogkon beverage market is anything to go by, Nigerians consider beverage cans highly aspirational. The available amount of SABMiller’s Castle beer in cans was astounding, especially since importing beer in cans is forbidden by law. But who cares if the police can be bought off with some baksheesh? The same applies to energy drinks. Total consumption of energy drinks in Nigeria is probably small, yet you would not believe it from the sheer number of brands available at this market. Officially registered energy drinks have numbered only 31 between 1999 and 2007. Yet imported brands without official approval must be over 150, media reports claim.

*

Although beer consumption has been going up for some time now, competition is fierce. So fierce that both NBL and Guinness Nigeria refused to talk to me when I came to Lagos. In the case of NBL remaining shtoom made sense since they had initiated a court case against Pabod Breweries for violation of their Star brand’s trademark bottle design and did not want to be drawn out on that.

But in the case of Guinness? What could they want to be hiding? In the end I decided to drop my good manners and gate-crash Guinness in Lagos. Of course, I had approached their PR plenty in advance but without luck. So I drove up to their headquarters and asked to see their PR in person. It worked. A few moments later I walked into Guinness’ headquarter, a flashy, cool admin building in corporate colours, where people lounged on beige leather sofas in the lobby and climbed polished black marble stairs.

Guinness and Africa - most likely the aphrodisiacal innuendo of "Guinness is good for you" will come to mind. Although years ago Guinness cleaned up its marketing in politically-correct fashion, Guinness is still known to Nigerians as “black power”, or “Viagra”. Obviously, a deeply ingrained myth is hard to delete from people’s minds. Not that it renders Guinness’ sales in Nigeria a disservice. Far from it. Guinness Nigeria began in 1950 as a trading company importing Guinness Stout from Dublin. Twelve years later demand dictated that Guinness built its first brewery outside the British Isles in Lagos. Despite Nigeria’s political and economic ups ands downs over the past two decades, the market has grown in importance for Guinness. In 2004 the net income from sales of its eponymous stout in Nigeria overtook that of Ireland. Were it not for Nigeria (representing half of Guinness’ volume sales in Africa) and fellow African markets, Guinness’ total brand volume would decline, a JP Morgan Chase analyst wrote back in 2004.  

Guinness’ brands in Nigeria include Guinness FES and Guinness Extra Smooth, which was introduced in 2005 to compete with other premium-priced lager beers. On the lager side there is Harp Lager, which was introduced in 1974 and as recently as 2004 relaunched in a new bottle to fight NBL’s Star. There is also Satzenbrau Premium Pilsner, launched in 2006 as a repositioned version of the lager first introduced into Nigeria in 1995. To complete the alcoholic side of the portfolio, there are two so-called Ready-To-Drink beverages: Gordon’s Spark, introduced in 2001 and Smirnoff Ice, launched in 2006. Like Heineken, Guinness brews a malt beverage: Malta Guinness originally introduced in 1990.  

Of the two major brewers, Guinness Nigeria, with an estimated market share of 28 percent (Barth Report/Germaine Hansmaennel) is the more reticent when it comes to making financial information available on the web. Why? Are we not supposed to find out how well the company is doing? Is it taboo to know that Diageo – through is subsidiary Guinness Overseas Ltd. – holds 46 percent of the shares? Or is it a big secret how many shares the directors individually hold in the company? Because we could easily work out how much money in annual dividend payments they receive? Incidentally, Diageo’s men on the board have no shares in the company.

In its past financial year ended 30 June 2007 Guinness Nigeria reported that profit after tax rose to NGN 10.7 billion (EUR 55 million) against NGN 7.44 billion in 2006. Similarly, turnover rose substantially from NGN 53.65 billion in 2006 to NGN 62.3 billion (EUR 340 million) in 2007. The reported net profit margin was 17.2 percent and the EBITD margin 27.29 percent. On an international scale – if we take, say Latin America’s 35 percent EBITDA margin as our benchmark – that’s good but not very good. When it comes to market capitalisation, Guinness Nigeria at the end of May 2008 was valued at NGN 201 billion (EUR 1.15 billion).

When analysing Guinness Nigeria’s dividend history a pattern similar to NBL’s emerges. Since 2000 Guinness Nigeria’s shareholders have pocketed more than 50 percent of their company’s annual net profit. In 2003, the payout ratio was as high as 84 percent. Skimming the profits can have many reasons. I can think at least of two: one, Guinness Nigeria assumes the country has reached more stable times and with no big consolidation deals in the offing the brewer can start rewarding its investors; two, the brewer hopes to bring up its share price and thus the value of the company. Analysts say that increased dividend payouts have a clear effect on share prices.

Perhaps this is the bit of information both companies don’t really want to share with the likes of me nosing around: subsidiaries being milked for profits while parent companies retain theirs. Anyhow, this provides a new perspective on InBev’s recent decision to change its payout ratio. In February this year InBev’s CEO Carlos Brito swept away InBev’s 33 percent cap on its dividend payout ratio to give four-fifths (that’s 80%) of earnings out as dividends. In so doing, InBev put itself ahead of spirits group Diageo at 59 percent, SABMiller at 42 percent, Heineken at 30 percent and Carlsberg at 20 percent, it was reported.

*

Dante cannot have held judges in high esteem. Or he would not have made the demon Minos the judge of the damned. In Nigeria, lawyers and judges are a world apart. Usually justice prevails. It’s just a question of living long enough to see justice done. In the case of Pabod Breweries (see our previous issue), everybody’s distrust of the Port Harcourt judge assigned with the case was justified. Being on promotion track to some other court, he apparently bolted from casting a verdict. Either, the Rivers State government, being Pabod’s majority owner, decided not to throw its weight about (good reason), or the judge thought it better to chicken out – the case was adjourned three times - rather than to make himself a powerful enemy (bad reason). Be it as it may, Nigeria’s legal system has made some provision against a judge’s tardiness. The court has only 90 days after the first hearing to come up with a verdict. The verdict will be announced as we are going to press. Even if the verdict refutes NBL’s claim, Pabod’s executives expect NBL to file an appeal. In the meantime Pabod has launched its Grand beer in Nigeria’s generic bottle. End of story? No. Nigeria is a key African market for brewers. Expect the action to heat up again.

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