Producers of carbonated drinks should get ready for the worst as government mulls imposition of excise duties on soft drinks such as Coca-Cola, Pepsi, Bigi Fanta etc.
At a time when consumer goods players are struggling with slower sales and thinning margin, the impact of the proposed excise duty will further depress top and bottom-line. This was the experience of their counterparts in the brewery space when government imposed higher levies on their products.
‘Over the last 16 months, the increase in the excise duty has been pressuring their margins and combined with weak consumer spending’, said Abiola Gbemisola, a research analyst at Lagos-based investment firm, Chapel Hill Denham.
According to Gbemisola, brewing companies have not been able to increase the prices of their products to offset the impact of higher duty as a result of the weak purchasing power of an average Nigerian.
Last Month, Nigeria’s Minister of Finance, Zainab Ahmed, while addressing the media at the side-lines of the recent annual meeting of the International Monetary Fund in Washington , said Federal Government is contemplating on the introduction of excise duty on carbonated drink as a source of additional revenue to cash-strapped government.
“In expanding the revenue base, we have proposed the increase of VAT but there are also other revenue streams that we are looking at and some of them include the introduction of excise duties on carbonated drinks but there is a process to doing these things,” Ahmed explained.
An excise duty is a levy placed on the manufacture of locally produced goods. Government introduce excise duty basically to discourage the purchase of goods that may harm consumers or the environment.
The carbonated soft drink market commands a unique hold in the food and beverage sector in Nigerian economy.
Despite the huge popularity of the juice and still drink market, the unique tasting appeals of carbonated soft drinks and its many array of flavour have always been a strength other drinks cannot match.
Innovation has centred on flavours this year as companies like Pepsico and Unilever introduced new ready to drink Lip tea drinks and Pepsico’s new flavours such as Pepsi berry, Pepsi lime and Pepsi mango.
Also, Coca-Cola increased the volume of it drinks from 35cl to 50cl and Chapman increased theirs to 60cl still at the same price of N100.
“They are testing the water generally and growing their portfolio by introducing more flavours in the market, it is an additional increase in sales for them, an inventory manager at Coca-Cola who wishes to be anonymous said.
“So it is a two way thing if the duty is placed on them. They will have to increase prices and if they do that they will lose money, be less profitable and most of them will restructure their business and if they don’t increase prices due to the weak purchasing power, they will have to let go of some of our staffs,” the manager said.
Nigeria’s fast-growing population brings with it a continuing demand for soft drinks, especially as the climate is quite hot. According to Euromonitor International, a global market intelligence publisher, the country ranked fourth globally in the volume of soft drink sales recorded in 2016.
It is believed that an excise duty is a charge that the consumer is supposed to pay not the company.
“In a situation where most players implement a pass on to consumers, I believe demand would not be significantly affected because carbonated drinks are not very elastic,” Ayorinde Akinloye, a consumer analyst at CSL Stockbrokers said.
Akinloye maintained that players who hike prices to offset the impact of the duty may see demand for their products drop as consumers will most likely switch to substitutes that are not affected by price increase.
