Weak naira pressures consumer goods firms

The effect of the increasing cost of doing business, along with slowing economic growth is manifesting in the recent numbers of Fast Moving Consumer Goods (FMCG) firms operating in Nigeria, as production costs spike, amid foreign currency restrictions.

Since most manufacturers import raw materials, it is expected that the recent fluctuation in the naira will spiral the production costs of these firms.

Experts say that beer makers and flour millers import more than 50 percent of their raw materials and other inputs, which means they are hard hit by the impact of the falling naira, despite falling commodity prices at the international markets.

“Imported raw materials are currently putting an upward pressure on consumer companies’ cost of sales, due to the volatility of the USD/NGN. Notably, the prices of soft commodities have moderated on global supply glut,” said Tajudeen Ibrahim, head of equity research at Chapel Hill Denham, in a telephone interview.

“Devaluation affected lower pricing of raw materials,” said Ibrahim. The latest earnings release of Flour Mills Nigeria Plc, Nigeria Breweries Plc, Honeywell Nigeria Plc, Guinness Nigeria Plc and International Breweries Plc, showed cumulative cost of sales increased by 15 percent to N480.86 billion, from N418.15 billion the previous year.

The firms’ combined sales increased by 7.20 percent to N663.65 billion, amid pressured consumer wallets.   

The Central Bank of Africa’s largest oil producer devalued the naira in November 2014, with a view to curbing inflation and stabilising an economy that has been hit hard by a significant drop in oil price to $29 per barrel. 

The apex bank has left the currency pegged at N197-N199 and further imposed foreign exchange restrictions on 40 items, a policy that has been criticised by some economists and investors.

“The edicts have made it difficult for manufacturers to import raw materials and obtain dollars needed to operate,” said, Frank Udemba Jacobs, president of the Manufacturers Association of Nigeria, which represents more than 2,500 companies.

Economic growth slowed to 2.84 percent in the third quarter of 2015, the lowest in a decade. Inflation has also risen to 9.6 percent, stoked by rising food index, according to  Nigerian Bureau of Statistics (NBS) data.

These aforementioned challenges manifested in the numbers of the five consumer goods firms, as cumulative operating expenses increased by 17.15 percent to N141.71 billion in the last quarter of 2015, according to data compiled by BusinessDay.

Operating income for the five firms fell by 8.30 percent to N83.35 billion in 2015, while net income was up by 18.97 percent to N61.42 billion in the period under review.

Some industry experts are suggesting that import dependent firms should source raw materials from countries whose currencies have moved lower against the dollar, such as South Africa, to reduce FX losses.

They also posited that firms could further use Information Technology to find the most efficient source of raw materials. Nevertheless, there are positive prognoses for consumer firms, as government’s expansionary fiscal policy in its 2016 budget is expected to trickle down and increase the purchasing power of consumers and increase the demand for consumable goods.

President Muhammadu Buhari in December, asked lawmakers in a speech in Abuja, to approve the country’s biggest ever budget.

Buhari outlined plans for government to spend N6.08 trillion ($30.8bn) in 2016, an increase of about 35 percent over 2015. 

“Gleaning from the spending plans inferred from the 2016 budget, we anticipate a drop in unemployment levels, accompanied with increased consumer spending,” Saheed Bashir, head, finance and operations at Meristem Securities Limited, said in an email note to BusinessDay. “This, unarguably, should augur well for the economy at large, and particularly for top line figures of companies in the Fast Moving Consumer Goods space,” Bashir said.

BALA AUGIE