Lagos — For brewing giants AB InBev, Heineken and Diageo competing for market share in Africa’s most populous country, the Nigerian government’s decision to hike excise duties is another setback in an underperforming economy.

President Muhammadu Buhari’s administration followed up its June decision to impose taxes on beer and spirits by deciding in January to implement another phased 17% increase in duties on alcoholic beverages. The move, in part to counter flagging revenue from the key oil industry, is making the business environment more difficult for the drink giants in an economy that contracted in 2016 and has faced double-digit inflation since then.

“The tax increase is hitting revenue,” Michael Famoroti, economist and partner at Stears Business, said by phone from Lagos. “You are unlikely to see healthy revenue growth in the industry as the phased implementation continues. Companies will not be able to pass on the full burden of the tax.”

The government raised the taxes and increased borrowing on local and international markets after failing to meet its revenue targets in the past three years, primarily due to lower-than-expected oil exports — its main source of income. Budget and planning minister Udo Udoma put the state’s receipts at about 55% of expected earnings in 2018. The levies have hit demand.

“Consumers remain highly sensitive to price movements following the broad-based cost escalation in the past few years amid little-to-no income growth,” said Ifedayo Olowoporoku, a markets analyst at Lagos-based Vetiva Capital Management. “We expect higher pressure on discretionary, nonessential products such as beer.”

Difficult Environment

The numbers were already bad in 2018. Heineken’s local unit, Nigerian Breweries, reported 2018 net income that fell 41% from the previous year to 19.4-billion naira ($54m) due to “increased excise duty rates” as well as “a challenging operating environment”, CEO Jordi Bel said during an investment call in February.

The company partially backed down from price increases it attempted in June in response to higher taxes. Sales still declined 5.9% in 2018, and 2019 could even be more challenging, Bel said.

Rising Costs

International Breweries, the local unit of AB InBev, declared a loss of 7-billion naira for the nine months through September, citing rising costs that included taxes. Diageo-owned Guinness Nigeria saw its growth blunted by the higher levies, CEO Baker Magunda said during an investment call in January.

The companies didn’t answer calls seeking comment.

The companies’ share prices have taken a hit. Guinness’s stock has fallen 13% in 2019, compared with a 1.9% drop for the Nigerian Stock Exchange all share index. Nigerian Breweries shares have slumped 26%, while International Breweries has declined 15%.

The brewers’ difficulties are forcing the government to have a rethink of the taxes, said Paul Abechi, a spokesperson for finance minister Zainab Ahmed. The administration is looking to address the tax grievances “in a mutually benefiting way’’, he said.

Premium Brands

While the brewers wait and see limited opportunities for growth in sales of lager, they’re pushing premium brands shielded from higher costs, as well as the nonalcoholic drinks exempted from excise charges.

“With the operating terrain still challenging, we believe brewers will be cautious on price increases as they look to defend their market share,” Vetiva’s Olowoporoku said.

Guinness plans to increase its share of income from spirits, and Nigerian Breweries is focusing on its premium Heineken, stout and malt drinks for growth.

Brewers in Nigeria are confronted by “a combination of slow volume growth, a flat beer-pricing environment, intense competition, higher raw material costs and higher excise, culminating in declining cash margins”, said Adedayo Ayeni, an analyst at Renaissance Capital in Lagos.