FMCGs mull price increases on volatile naira, inflation

Fast Moving Consumer Goods (FMCG) firms in Nigeria are on the brink of jerking up product prices as they seek to stay afloat amid strong economic headwinds, BusinessDay reports.
The intended price increase comes as acute dollar shortages, spiralling inflation and power supply challenges jerk up operation costs.
“Most companies said they intend to increase product prices by 10-20% in 2H16 to offset the impact of naira devaluation on imported Cost of Goods Sold (CoGS) and higher inflation,” said Seki Mutukwa, Frontier Markets Analyst at investment firm, Renaissance Capital, in an e-mailed note to BusinessDay.
“They have not seen an improvement in FX availability in the interbank market since the devaluation in June 2016, which has resulted in capital expenditure deferral and rising FX-related trade payables,” Mutukwa added.
The naira firmed 1.8 percent to trade for N314/$ as at 2:00pm at the interbank market on Wednesday, compared to N320 on Tuesday.
Informal traders said the currency sold for N415/$ at the parallel market.
The cumulative cost of sales of 11 companies in the beverages and consumer goods industry will rise by about 52.23 percent to N1.18 trillion in December 2016 from N775.13 billion recorded last year, according to BusinessDay projections.
This is three times the figure of headline inflation which quickened to 17.10 percent (year-on-year) in July, from 16.50 percent in June, according to latest data from statistical body, the National Bureau of Statistics (NBS).
Nigeria has seen the price of oil, which accounts for 70 percent of government revenue and nearly 95 percent of its foreign exchange earnings drop by 50 percent since mid-2014.
The economy contracted by 2.1 percent in the second half of the year, stretching negative growth even further from -0.38 percent in the first quarter. The International Monetary Fund (IMF) expects GDP will contract further by 1.80 by year end.
While the Central Bank of Nigeria (CBN) has adopted a flexible exchange rate policy in order to trigger foreign exchange liquidity, companies are finding dollar supply unpredictable as they have to wait as much as three weeks to get dollars.
Many factory owners can still only access the hard-currency they need for importing equipment and raw materials on the black market, where dollars are more expensive than on the official one, said Frank Jacobs, president of the Manufacturers Association of Nigeria.
“I don’t think there are any more dollars in the system since the devaluation,” he said in an interview in Lagos, Nigeria’s economic hub, on Aug. 25. “Not much has happened so far.”
Despite the frail macroeconomic conditions and tough operating environment, analysts say some consumer goods firms will weather the storm, given their market penetrating products and excellent distribution channel.
“We prefer Nestlé Nigeria given the brand loyalty of its key products, Maggi and Milo, consistent track record of positive top-line growth, returns above the cost of capital and reasonable valuation,” said Mutukwa.
One competitive advantage Nestle has over rivals that import most of their raw materials is that it produces 92 percent of what it sells locally.
Gas shortages, caused by militant attacks on pipelines, have worsened power supply and have left firms groaning.
“The power crisis has worsened and we have had to turn to diesel, which is 60 percent more than the price of petrol,” said Dharnesh Gordhon, CEO of Nestle Nigeria, in response to questions. “If I met the President today, I’ll ask him to resolve the electricity supply challenges.”
Manufacturers and companies are also calling on government to ease the ban on the 41 items, as most of the raw material component of certain products can only be sourced abroad.