Trade/SCF solution for brewery in Nigeria

The challenge

Nigerian Breweries was faced with some daunting business challenges arising from the current macro environment.

Specific issues included:

• Macroeconomic risk: slow economic growth in 2015 and recession in 2016 showed evidence that there may be reduced demand for Nigerian Breweries’ products.
• FX/devaluation risk: given that some of its raw materials are imported, Nigerian Breweries Plc was exposed to naira devaluation risks that adversely affected its margins.
• Increased cost of production from locally sourced materials.
• Letters of credit (LC) issuance structures had dried up in the market as most banks lost LC confirmation lines from correspondent banks.
• The outright ban on the use of the CBN FX window for the importation of some packaging materials forced Nigerian Breweries to use locally available packaging substitutes. This temporarily increased the strain on production while also increasing the local currency payable needs of the company.
• Tightening cash flow situation as a result of the fact that Nigerian Breweries had to continue to place naira with the CBN for FX purchase requests. This affected the cash flow of many corporates that had to leave idle cash with the CBN to have access to FX when available.

The solution

In light of the challenges described above, Nigerian Breweries reached out to banking partners to proffer a bespoke, encompassing solution to address the challenges associated with foreign procurement (imports) and local purchases that were threatening to affect the ability of the company to have products on the shelves as well as remain profitable.

Nigerian Breweries were concerned about mitigating the effects of the macro-economic conditions on their working capital. Citi were eventually selected to provide a solution and working with a multi-functional team were able to provide an end-to end solution that was implemented throughout the course of 2016.

“We are motivated and excited at Winning an Adam Smith Award. This award is a recognition of the dedication and creativity displayed by members of the treasury led cross functional team working in a tough operating environment. We thank the organisers for this international recognition. We will continue to strive for innovative solutions as we forge ahead in pursuit of our objectives.”

Core to this solution was a customised deferred, clean LC issuance structure. This utilises LC confirmation lines from Citi offshore and allows Nigerian Breweries to issue LCs without necessarily having FX. This helped the company better plan its foreign purchases as they knew the value of LCs they could issue at every point in time.

Also, Citi Nigeria issues confirmed deferred LCs to Nigerian Breweries’ suppliers and leveraged its correspondent bank relationships to issue and confirm the LCs.

The second key part of the solution is supply chain finance (SCF). Nigerian Breweries used Citi’s Supplier Finance Solution across their broad range of local suppliers. This scheme enabled them to increase the payment terms of all their suppliers in order to manage tight cash flows more efficiently.

Best practice and innovation

This multi-faceted project has highlighted numerous instances of best practice and innovation. Most notably, the level of collaboration between the Nigerian Breweries’ treasury team and Citi was especially impressive.

Also, Nigerian Breweries developed a methodology to classify raw materials and spares for allocation of scarce FX. This process helped ensure the running of the plants, as the company was able to match the items of import to the deferred LC tenor buckets.

Technology has also been used effectively and Citi’s Supplier Finance solution is not only innovative but revolutionary in Nigeria, as traditional supplier finance solutions were manual and offered quantitative benefits to the vendors but not the buyers.