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Brewing

Background

The brewing industry is one of the fastest growing branches of Nigerian manufacturing.6 It contributes about 28 per cent of MVA (Manufactured Value Added) and provides direct employment for over 30 000 persons. The indirect employment associated with the industry is close to 300 000 including the firms producing ancillary services. Beer, which is the most common product, is produced in all states of the country except Bauchi, Borno, Gongola, Niger and Sokoto.7 There are now 32 breweries producing more than 40 brands of beer. In addition, there are five brands of stout and five brands of malt drinks. In 1987 an estimated 2 billion litres of beer were consumed in the country.

Production has grown rapidly. In the period 1980-82, brewing was the fastest growing branch of the manufacturing sector. The volume of production in 1982 was five times greater than in 1970. Even during 1982-86, when most manufacturing branches experienced severe difficulties and production levels fell significantly, the industry continued to grow slowly. Production fell marginally during 1987 and 1988 due to restrictions on the import of barley malt and problems associated with the use of locally produced substitutes. During this period, capacity utilization fell to an all-time low of about 30 per cent. Increasing success with local substitutes for barley malt has improved the capacity utilization rate to about 64 per cent in 1991.

The search for local substitutes for imported barley malt involved most of the firms in expensive experiments with research and development departments as well as substantial plant conversion expenses. Their efforts were complemented by the independent research endeavour at the Federal Institute of Industrial Research, Oshodi (FIIRO), which, through some of its research report series, demonstrated that lager beer could be produced using sorghum exclusively. Today, most of the more successful firms use maize and sorghum in their beer production process. However, the changeover in input mix has necessitated the use of expensive imported enzymes in the production process.

Description and history of the firm

Origin, ownership and structure

Nigerian Breweries Plc (NBPLC) is the country's pioneer brewery. Incorporated in 1946, it commenced production in 1949. It started as a joint venture between the United African Company (WAC) International, UK and Heineken of Holland. Thus, at inception, it was 100 per cent foreign owned. By the early 1950s, when it began operating fully, some indigenous traders already involved with its products were invited to become shareholders. Under the indigenization policy of the early 1970s the foreign shareholders were forced to sell a significant proportion of their holdings. Today, the company is 60 per cent Nigerian owned and 40 per cent foreign owned. The 60 per cent Nigerian stake is held by company employees and members of the public, while the 40 per cent foreign ownership is split almost equally between CWA Holdings Limited (for Unilever) and Heineken Brouwerijen BV.

The foreign partners now perform the role of technical advisers, with Unilever advising on commercial aspects such as accounting, purchasing, marketing and personnel, while Heineken does the same for technology. Organizationally, the company has four divisions: technical, finance, marketing and personnel, each of which is headed by an executive director.

Performance and development

At its inception in 1949, NBPLC had only Star Lager (Nigeria's first) on the market. Over the years it has broadened its product range. Except for the period 1984 86, when sales volume suffered an annual average decline of about 18 per cent, turnover growth in the company has generally been accompanied by growth in profit and production volume. Thus, when normal growth was restored in 1987, the 51 per cent and 83 per cent increases in turnover and operating profit, respectively, for 1987-88 were accompanied by about 35 per cent volume growth. Similarly, the turnover of about N1.7 billion recorded in 1991 was partly the result of 8 per cent growth in sales volume. However, from all indications, product pricing has been the major factor in the impressive growth in operating profits.

Table 9.10 presents indicators of the growth trend in the company. Apart from sales and profit, both net total assets and the numbers of employees have enjoyed respectable growth.

Table 9.10 Performance indicators for NBPLC

  1971 1975 1981 1985 1991
Turnover (Nm) 40.2 75.7 241.1 179.1 1 708.6
Pretax operating profit (Nm) 6.1 12.4 38.5 41.6 422.5
Net assets (Nm) 11.9 29.1 103.6 161.9 1 248.5
Employees 1 720.0 2 243.0 n.a. 3 998.0 4 297.0

Source: Company records

The deteriorating results recorded by the company in 1984-86 reflected the foreign exchange rationing policy of the period, which was necessitated by the severe balance of payments crisis of the post-oil-boom era. The import licence allocation of the company could hardly satisfy one third of its foreign exchange requirements. The government's mandatory backward integration policy in the mid-1980s saw the company establishing a 5 000-hectare farm, estimated to be worth N30 million, in Niger State. The farm is highly mechanized and produces mainly maize, rice and sorghum, with soya beans and cow peas as rotational crops. The main crops are used as replacements for barley malt. The changeover in input mix was assisted by the company's N2 million R&D facility, which was commissioned in June 1987. and plant conversion costing about N100 million.

The company works with highly structured plans, with annual budgets of intentions translated into explicit targets. The decision board sits towards the end of the year to deliberate on the report of each divisional head. Annual budget estimates are made in the middle of year while decisions on annual plans are left till the end of year.

The company has experienced remarkable changes in its technical capability. In 1949 it used to take between 28 and 30 days to produce a bottle of beer but with technological improvement it now takes about two weeks. The change in input content in the late 1980s also involved changes in processing technology.

Different measures of productivity are used for the technical division and other divisions. In the technical section, productivity is measured in terms of the efficiency of plant operation and also in terms of capacity utilization. In other divisions, it is in terms of the accomplishment of assigned responsibility. The company is viewed as a leader in the national industry and in Africa it enjoys a high rating, in terms of both productivity and product quality.

NBPLC concentrates on the production of its beer and related products, leaving ancillary services such as bottles, crown corks, labels, cartons and crates to be supplied by other local manufacturers. In fact, Nigerian law precludes a brewer from producing such ancillary services. Only the companies in the soft drinks industry appear to sponsor firms to produce such services. Backward integration into farming was a special concession granted to the breweries in 1984 following the stringent foreign exchange control measures introduced in that year. It also uses outside transport companies for 60 per cent of total distribution.

The company cooperates with other producers in the industry in lending materials which are urgently required. Under the umbrella of MAN, it cooperates with competitors to discuss issues affecting the industry, e.g. adverse government policy. There is no collusion with competitors in marketing and no cooperation in technical services, probably because most of the local brewers have foreign technical partners.

The prosperity of the company has been preserved by its efficient costing system, which seeks to protect profit margins in a high-inflation setting by adjusting prices in response to changing costs of production. Input costs rose about 1053 per cent in the period 1982 to June 1992 and selling prices have risen to almost the same extent.

Human resources development

NBPLC's major strength is the quality of its staff, which is of the highest calibre thanks to training and staff development programmes. Both internal and external training occur regularly. Most of the technical training programmes are handled by Heineken, which is known world-wide for its expertise in brewing. The commercial aspect of its training programme is usually handled by its commercial partner, Unilever.

There are two broad categories of employees, management and non-management. Management comprises senior management, middle management and management assistants. Non-management staff is subdivided into senior supervisors, skilled workers and unskilled workers. Technical employees (i.e. engineering and production) comprise about 55 per cent of staff at the management level and 70 per cent at non-management. The changes in the various categories in selected years between 1985 to 1991 are shown in Table 9.11. The company follows standard recruitment processes featuring advertisements, screening and various levels of tests.

Table 9.11 Manpower statistics for NBPLC

Category 1985 1989 1990 1991
Unskilled/semi-skilled 1 944 1 687 1 703 2 013
Skilled 1 306 1 113 1 226 1 257
Foreman/supervisor 388 682 572 552
Senior supervisor 17 87 99 128
Assistant management 157 144 149 156
Management 186 190 193 191
Total 3 998 3 903 3 942 4 297

Critical skills are generally acquired through paper qualifications or on-the-job training. At the management level, a minimum tertiary qualification' e.g. a first degree, is required. After employment, the individual undergoes structured training for about 18 months before being formally recognized as qualified to work the system. For technicians, a minimum of 12 months' training is required. Non-technical graduates undergo a management training programme of 18 months to acquire specific management skills relevant to their vocation. The only exception to this structured programme is for mid-career recruitment, where unexpected gaps in the management structure are bridged with suitably qualified experts from outside the system. This does not apply in the technical division because of its peculiarities: assistance to bridge gaps in the management cadre is always available from the technical partners.

Specific skills training is organized on an in-house basis with suitably qualified trainers in all divisions. Outside resources, both local and international, are often used to supplement the in-house capability. Under the staff development programme, personnel are given opportunities to realize their potential. Their strengths and weaknesses are assessed early in their careers and a career path is suggested which would offer challenging opportunities and rewarding work. Thus, the employee goes on training, locally and internationally, gets specific assignments and is pointed to jobs to grow into in the future. All these factors are articulated into well-laid career and succession plans so that staff members are adequately motivated and identify closely with the business.

NBPLC is a manufacturing concern with many shop floors, so industrial relations are a major plank of management practice in the organization. It has evolved a culture built on understanding between workers and management. Occasional zero-sum relations are usually accommodated.

Remuneration policy is built on a merit-based appraisal system unrelated to age or experience. Working conditions compare well with other manufacturing concerns, locally and globally. Elements of the working conditions include:

• a good safety record.

• fairly generous housing allowances.

• almost free lunch for all levels of management.

• free company medical services.

• free cartons of company products to every category of worker monthly.

The average labour turnover is about 6-7 per cent, which is not regarded as a problem. One minor threat to manpower stability comes from the oil exploration industry, whose members often poach the engineering staff after their rigorous and highly structured in-house training.

Export history and performance

NBPLC entered the export market for the first time in 1986 with about 6 668 small bottles (valued at 24 138) of Star, a mild lager and Gulder, a stronger brew. The number of bottles exported grew to 43 693 (158 169 or N744 710) in 1987 but fell to 22 144 (80 161 or N503 571) in 1988, after which the company withdrew from the market until 1992 when it resumed exports. In 1992 about 156000 bottles valued at N814 115 were sold. During both phases of its export history the target market has been West Africans currently living in the UK and Europeans who have visited or worked in West Africa.

The company's withdrawal from the market in 1988 was occasioned by the ban on the importation of barley malt' which forced the company to look for local substitutes. The initial use of maize and sorghum caused a drastic change in the taste of the products. This problem was solved around 1990 after N100 million had been spent on technological change and adaptation, principally the installation of mash filters. In making these changes the company received complementary assistance from its technical advisers in Holland. With the changeover to maize and sorghum, less sugar is used - 5 per cent as opposed to the 15-20 per cent when using barley malt. However, biological catalysts such as enzymes are now required.

The interval between the two export phases saw the emergence of unauthorized' or 'grey', exports. Export strategy now aims at dislodging such grey exports using a price strategy, with the company only seeking to break even in that segment of its operations.

External factors affecting exports

Exchange rates

One major feature of the structural adjustment process which began in 1986 is the emergence of an auction market which determines the exchange rate. The naira has since depreciated continuously. The official rate fell from about N0.89/US$ in December 1985 to about N25/US$ in April 1993. This has tended to enhance the competitiveness of the company's exports since all aspects of costing and pricing are carried out in the domestic currency. Currently! Star Export is invoiced to the company's export agents at less than US$5 per carton. which appears quite cheap when compared with the average selling price of rival products in the international market.

A side-effect of the present exchange rate management system (perhaps, of the underlying scarcity of foreign exchange) is the rationing and hoarding of foreign exchange by conventional suppliers, i.e. banks. The company sometimes encounters problems with obtaining foreign exchange from such conventional sources of supply.

Raw materials

The shift from barley malt to maize and sorghum has already been described. Both maize and sorghum are supplied locally. The bulk of the company's purchases are on the open market, since the company's farm supplies less than 10 per cent of its requirement. A national grains centre has been established in Jos and this centre ensures that the company's requirements are readily met.

Activities of export agents

The company's export sales strategy has been to use export agents. This strategy failed to yield the desired result during the first phase of its export initiative, in 1986-88. The problem was not with sales but rather with returns, as most of the agents failed to repatriate the foreign sales earnings to the company. An investigation conducted by the company revealed that the fundamental problem was that the agents were selected without any investigation as to their reputation and reliability. Under the present export initiative, new export agents were chosen after adequate screening, including an interview at the Lagos head office. The company has taken the fraudulent export agents to court and the case is still pending in London.

Tariff levels of African countries

NBPLC has found it impossible to target African markets, especially the neighbouring West African countries, because of their high import tariffs. Most of these countries depend on import duties of up to 90 per cent to generate revenue, which renders imports quite uncompetitive in the local market. The company, in conjunction with other export manufacturers under the umbrella of the Manufacturer Export Group of MAN, has been pressurizing the Nigerian government to use the forum of ECOWAS to address the problem. In the meantime, smugglers are having a field day dealing in the company's products.

Strategies, capabilities and linkages

Production strategies

The production of ancillary materials such as crown corks and bottles is contracted out under conditional contracts which can be terminated if the service is unsatisfactory.

Outside suppliers are relied upon for 90 per cent of the maize and sorghum used. The company used to engage in contract farming but this was stopped around 1990 because the farmers did not fully comply with the arrangement. If the harvest was bad, the farmers would sell on the open market to capture abnormal profits but in a good harvest season they sold their produce and that of other farmers not privy to the agreement (and which they obviously bought at market prices) to the company at the enhanced contract price. The project thus became too expensive to monitor. A plan to distribute the appropriate varieties of sorghum seedlings to farmers in order to encourage continuous supply was never implemented because the pricing strategy was not agreed upon.

In the 1960s and early 1970s, the company used to produce under franchise for labels such as Schweppes. Nowadays all available capacity is utilized for its own production.

Investment strategies

Investments usually take the form of a new product, a new production line or extensions to an existing one. In all cases, the principles of project evaluation are observed. Yardsticks such as the net present value, IRR and accounting rate of return are usually applied to proposed projects. Adequate allowance is made for human factors such as market demand, availability of personnel, government policy, etc. Where the capital requirement is large, the views of the technical partner are often sought. The company has adequate in-house capability in manpower and equipment to handle its project evaluation requirements and has not so far employed outside consultants for such purposes.

Marketing strategies

The export marketing structure (via agents) has already been described. Product occupies a central place in the marketing strategy. This explains the company's withdrawal from the export market following the perceptible change in product quality in the late 1980s.

Price is perhaps the most used marketing instrument. Apart from its relevance in the context of general sales volume, it is currently being used by the company to dislodge those 'grey imports' that took centre stage during the withdrawal from export markets in the late 1980s. Promotion supplements the price and product instruments, mainly with radio and television advertisements and posters.

Innovation strategies

The innovation strategy of the company combines technology search, product development, human resource development and management control processes. Technology search is basically restricted to foreign countries. It is usually carried out on the company's behalf by its technical partners. Under an agreement with the partners, every article published on brewery technology anywhere in the world is sent to the company daily. This prompts the company to carry out a technical review on an almost daily basis, leading to frequent updating of technology.

The place of product development in the innovation strategy of the company is obvious from the development history of the company given on pp. 270-2. However, with respect to the export market, it is not technically new product but rather small bottle versions of existing brands which are exported.

The company's human resource development policy was also described on pp. 272-4. In spite of its extensive, structured and rigorous training programmes, the company does not depend on its staff for any technological breakthrough. Rather, it expects them to be competent to adapt and maintain any relevant technology.

Management control in the organization basically takes the form of formulating corporate plans, deriving annual budgets from plans, translating overall budgets into departmental budgets and setting standards at the departmental level for individual units. There is always one superior officer to check on a worker's performance and to correct errors.

Investment capabilities

Project identification is usually informed by corporate plans and objectives. Assistance in this regard is readily available from technical partners. The organization does not borrow money because it has access to ample funds from its retained earnings. It does sometimes encounter problems with obtaining foreign exchange from banks.

Production capabilities

The beer production process is completely automated. The production technology and machinery are from Europe, particularly the Netherlands. The repair and maintenance of machinery and equipment used to be handled by the technical partners but due to economic circumstances and rising costs the company has set up its own repair and maintenance division. The technical partners only come in when the skill required is beyond the local manpower.

Marketing capabilities

The company maintains its market shares using a combination of price, product quality and promotion, reinforced by an efficient distribution strategy. Market information is usually collected by company salesmen from wholesalers and retailers and analysed by officers in the marketing department.

Product development policies were dictated by the technical partners until after the indigenization policy. One new product, Rex beer, was developed as an experiment with local substitutes for barley malt. Another, Legend Extra Stout, was a response to the activities of a major competitor, Guinness Nigeria Ltd. which introduced a competing beer and a malt drink. Legend Stout was developed to enter the market for stout and so protect profit levels.

For established products, pricing often follows cost trends. But newly launched products are priced at break-even as a deliberate marketing strategy.

The efficiency of the sales force is measured in terms of monthly sales volume compared with monthly targets. The sales force receive more free cartons of company products than their counterparts in other departments.

The factors which have led to success and failure in exporting are:

Success:

• product quality

• price advantage from depreciating exchange rate

• superb technical back-up

• availability of ample financing

• skilful personnel

Failure:

• smuggling of products into foreign markets

• high tariffs of ECOWAS countries

• dishonest licensed export agents

• limited access to foreign exchange

Linkages

The company maintains links with its technical partners as regards its process technology, repair and maintenance and advice on general technical matters. It interacts with factor markets to the extent that it owns a farm and purchases on the open market but it has no binding agreements with suppliers because local supplies of the crops are adequate.

It has no direct links and interactions with consumers except during promotional exhibitions. Its interaction with government policies is limited to cooperation with other brewers under a common umbrella, such as MAN, to lobby government on matters of common concern.


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