By Chinenye Anuforo and Chinwendu Obienyi
As the country is officially out of recession, it is yet to reflect in the purchasing power of consumers. According to Mr. Peter Ndegwa, the Managing Director of Guinness Nigeria Plc, prices of commodities are still going up “as we can see consumers holding back on spending, reducing frequency of purchases or going for lower-priced brands.”
However, Ndegwa is confident that the new strategies of his company will push it onto the path of profitability.
In this interview with Daily Sun, Ndegwa spoke on post-recession Nigeria, the operating environment and other sundry issues.
Excerpts:
Recession
One of the critical things we need to consider as far as the operating environment is concerned is the Gross Domestic Product (GDP), which has started to grow in the last quarter. This is good news as there are signs that the economy is coming out of recession. Again, we need more quarters to start seeing whether this has started reflecting in consumers’ pockets and costs of buying commodities are still going up as we can see consumers holding back on spending, reducing frequency of purchases or spending less anytime they purchase or going for lower-priced brands. If you look at the other KPIs (Key Performance Indicators), one of which is inflation, it is in double digits; food inflation is about 20 per cent. So consumers are not in great shape yet, from the manufacturing perspective, foreign exchange still remains an issue as the Nigerian economy has big import content. Although we are sourcing 75 per cent of our raw materials locally, there is still 25 per cent, which is a lot of money for our business.
When you are importing and accessing foreign currency, the foreign exchange market is very important. The past 20 months when liquidity was a problem, it was a big issue for us, even though we were able to get $95 million support from Diageo. The intervention of CBN (Central Bank of Nigeria) is quite laudable as it improved liquidity. This is one of the biggest positives we have seen in the GDP. This has brought stability in terms of the company’s ability to access liquidity. Our concern is how sustainable is this credit. Secondly, the shocks in the economy, oil price, security and policies are factors that need to be considered. The CBN has had different policies at different times but we hope that this one will continue to be stable because it provides the cover for companies to plan.
Dividend
If you look at the time when we were paying dividends, it has always been around 50 per cent. The distribution of dividends this year is not unusual. We distributed 50 per cent of our after tax profit. So if you are a long-term shareholder of Guinness, this will not be unusual. What I think shareholders will be worried about is: will Guinness continue to make profit? Is paying dividends the right thing at this stage? Of course, I cannot say at this moment whether we are able to make profits or not, but what I can say though is that we are very confident that we have undertaken the right strategy and we have gone through our rights issue, which will help us take out a lot of debts that we have had on our balance sheet. This has been a drag on our results. Last year, our interest cost was quite significant; about N7 billion. If you are able to significantly reduce that interest cost, then it means the profile of your profit will be more stable. Secondly, because we have reduced the debts, including the foreign exchange debt. Now that liquidity is more available, then you expect less volatility on the foreign exchange, which had previously impacted negatively on our profitability. So, we are growing better and starting to have more predictable growth. We are more confident in managing costs and interest on costs that we have been carrying and also the forex volatility.
What would you say is responsible for this positive result?
Guinness Nigeria Plc recently released its result to the public and we are very pleased about the excitement this has generated, especially among our key stakeholders. As we all know, Nigeria has gone through some tough times, so also has Guinness Nigeria. However, we have continued to focus on our strategies especially in the area of portfolio expansion. A few years back, the focus was primarily on Guinness Foreign Extra Stout and Malta Guinness. In view of the current economic scenario, the market has been down-traded into segments. So, as the economy has become more challenged, we are returning to price policies that are lower while offering value. For the beer side, the lower value segment of the market became the predominant segment and we were late in going into that segment. Thus, we started losing our shares and that’s why our results were affected in the past. But in the last three years, we have refocused our business and we are expanding, thereby participating in price policy which we were previously not involved in.
Again, our brand, Satzenbrau, has done very well and we are starting to see the trend that was started in the beer market in the malt category. We have also expanded in that category as we have gone into spirits. About two years ago, we got distribution rights for international premium spirits from Diageo, our parent company, to distribute brands such as Johnnie Walker, Baileys, Smirnoff, among others. We have expanded our product range for our consumers. Last year, we launched our local mainstream spirits, locally produced international brands in our plants here in Nigeria. We are proud that we have been able to launch five additional brands such as Smirnoff S1, Vodka Chocolate and Gordon Moringer, while we have also started producing brands like McDowells, of which we got distribution rights from United Spirit, owned by Diageo. Basically, we have expanded the range and we are going into segments that are growing which we were previously not in. Essentially, when you are in recession, you cut cost. This we did significantly to reduce waste, drive simplification, to improve our business. I think the recession is some learning curve for the country.
On where the country or where the business stands, a primary way of protecting yourself is to reduce costs. On an individual level, most people try to prioritise their investments, which is same for businesses which try to cut back on spends that are really not relevant, and start channeling some to where you are investing. As a result, we have improved the top-line, middle and also not limited by the challenges of forex (foreign exchange issue) that the country was confronted with. In the area of credit facilities, Diageo also helped us in excess liquidity which was not available in the market. Many businesses would have complained about challenges, such as lack of access to foreign exchange and consumers not buying their brands, among others, but we focused on portfolio expansion and we were able to take costs out. Ultimately, it was not difficult for us to turn a loss-making position last year into profits at a time when the economy was challenged.
Challenges
Organisations anywhere in the country will always look at the market. We also did, and we discovered that we were primarily participating in the premium brands – Guinness Extra Stout and Malta Guinness. At a time, this market was buoyant five years ago, until the value segment, which is also known as the affordable segment, suddenly became predominant. It was only 10 per cent of the total beer category but today it is close to 70 per cent. So you have seen the consumers down trading, not just because the economy was in trouble but because there was much choice available in the market. And you could argue, should we potentially have moved faster? Yes, we should have moved faster. There is always a choice you have to make, and we have made the choice to be in that category. We are offering more choices for our consumers. And I think our strategy is very simple and clear. Adapt price policy that consumers can afford and offer brands of high quality. So we still retain the quality offering that Guinness Nigeria is known for, while also accessing more consumers that we were not engaging before. In achieving this, we drove down cost so that we are able to price our brands right and then get a route to consumers. We have expanded the number of our distribution points and the route to consumers is a third leg of our strategy. This is actually not rocket science but we think the complication was that the economy was troubled. So we had the choice, which is to continue to be in our small premium segment or expand at a time when cost was going up. And that is why we decided to go after cost.
Again, I want to reiterate that productivity is not just about reducing costs but about going after efficiency. For example, in logistics, we have been able to reduce our cost with about $10 million in one year. And this had nothing to do with price, but about making it more efficient to transport our goods from our breweries to their various destinations. So clearly there was a lot of improvement in efficiency.
Again, if you look at Nigeria when oil price was selling at $110 per barrel, I am sure there was more waste than we have today. Even companies go through this cycle. In my opinion, I think the recession is actually a good thing for businesses. This is because during this time, you go back to the basics so that you can price right and get the portfolio that consumers can buy.
Are these strategies short, middle or long-term?
All our strategies are simple and can be easily implemented. In fact, they can be implemented forever. This is because Guinness is known as the house of quality. So when we offer spirits that are locally produced, we are saying you are getting world standard brands produced by a reputed house of quality, at affordable prices. Consumers can then make informed choices knowing that they are getting quality in an environment where counterfeiting and adulteration are big issues.