About 20 months agoJanuary to be precise, if you were to buy an International Brewery Stock, you would have to part with about N64 per share. It was the highest share price in about 5 years and in some ways,it signaled the dominance of the Budwieiserin the value beer segment. 

After making significant inroads with the likes of Hero Beer and Trophy Lager, the introduction of Budweiser, the self-acclaimed king of beers suggested that the beer war was theirs to win. While they seem to be winning both the war and the customers, they are losing on two other fronts – bottom line and share price. Unfortunately, this is where it really hurts asit gives shareholders reasons to doubt the company’s strategy.

International Breweries’ share price has fallen by a whopping 60.7% year to date, making it the worstperforming stock on the Consumer Goods Index. Opening the year with a share price of N31.50, the stock fell to a 5-year low of N12 per share by Friday, 9th of August 2019. In this year alone, shareholders have seen about N163 billion wiped out of its market share. 

What exactly is wrong: International Breweries business strategy to fight off competition from Guinness and market leader, Nigerian Breweries has been to start a price war and focus on cheaper beer, often termed value segment by industry analysts. Unfortunately, this strategy comes at a steep cost despite its immense benefits.

In its half-year June 2019 interim report, International Breweries reported strong revenues of N68.6 million, 29% higher than what it reported same period in 2018. 

  • On a quarterly basis,the company’s revenue has topped N30 billion every quarter since Q2 2018. In fact, International Breweries is now on track to overtake Guinness as the second-largest beermaking company in Nigeria. 
  • Despite these giant strides, margins have continued to shrink. For example, for every N100 in sales, it spends N69 as direct cost. And out of the balance of N31, it spends another N15 on marketing and promotion, as well as N20 on operating expenses, leaving it with an operational loss. 
  • On paper, the company does not generate enough revenues to pay for its humongous N225 billion loans.
  • Still, it managed to service interest, spending over N7 billion in the firsthalf of this year alone. To do this, the company simply owed its suppliers, increasing liabilities to N89.3 billion from N53.9 billion.

What this means: AB InBev, the parent company of International Breweries owns about 72% of the company while the other partners own 28%. Retail investors or minority shareholders obviously have little say in the direction the company is currently going. As they continue with their two-prong strategy of price war and cheaper brands, they will continue to lose money. But there are two major options the company could undertake which will provide the same results, thus presenting an opportunity for optimists

  • At some points, International Breweries will need to raise capital to repay its huge loans. This could trigger a share price rally if it decides to take this route.
  • It could as well decide to go private and buy out minority shareholders. This route, though expensive, is very plausible.
  • It is also the favoured playbook of most foreignowned companies on the Nigerian Stock Exchange. 
  • By the time it does decide to take this route, the share price could be trading below N10.