Consumer good firms are facing difficult times as rising costs of getting their goods to the market squeeze profits. Their problems are compounded by inability to get access to dollars and the rising cost of electricity in the face of declining purchases from Nigerians.
An analysis of the released financial of ten selected consumer good firms show their costs are rising faster than the average inflation rate in the country.
For the first nine months through September 2016, the total costs of ten companies in the beverages and consumer goods industry listed on the Nigerian Stock Exchange (NSE) increased by 27.68 percent to N501.44 billion from N329.19 billion last year, data gathered by BusinessDay shows.
The increase in costs is higher than the 17.90 percent inflation rate for the month of September, according to a recent report by the National Bureau of Statistics (NBS).
“The bulk of their raw material are imported and they source dollars from the secondary market and that explains the rise in production costs,” according to Esili Eigbe, analyst at Exotix Partners Limited.
“In my opinion, the outlook is weak since the dollar scarcity still remains a challenge,’’ said Esili.
Nigeria economy has been hit hard by a 50 percent reduction is the price of crude oil since mid 2014 that forced the Central Bank of Nigeria (CBN) to peg the naira at N197-N199.
This policy caused dollar scarcity forcing many manufacturers to slow down on inventory accumulation or source from the more expensive black market.
The cumulative net income of the 10 firms fell by 62.85 percent to N16.40 billion as at the end of September 2016 while net margins fell to 2.40 percent in September 2016 from 8.16 percent the previous year. Part of the losses was due to the devaluation of the naira by the CBN on June 20.
While the CBN had let go its 15-month currency peg and adopted a flexible exchange rate policy with a view to improving the supply of foreign exchange in the system, though that has not worked as well as it should due largely to the fact that the CBN still controls the exchange rate of the naira.
“Expectations that dollars would become available to manufacturers after the central bank abandoned its peg have been dashed,” Paul Gbededo, managing director of Flour Mills of Nigeria Plc.
“The aspiration is that once you devalue, the people will bring in their dollars; but we are not seeing that yet,” he said.
To get a round the dollar challenge some consumer goods firms are intensifying are cutting down on imported raw materials while sourcing for alternatives locally.
Flour Mills has announced plans to expand its Sunti Golden Sugar Estate, a farm in Nigeria’s northern Niger state where it cultivates sugar and rice, as it targets to reduce the dependence on imported sugar.
The company says it has invested N40 billion in sugar cane production and a sugar mill that is planned to begin work in early 2017, according to the Gbedebo.
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 Seki Mutukwa, Frontier Markets Analyst at investment firm, Renaissance Capital,
One competitive advantage Nestle has over rivals, which import most of their raw materials, is that it produces 92 percent of what it sells locally.
Some companies have also reduced the quantity of their products as a means of adjusting to the inflationary pressures including UAC, CHI Limited and Rite Foods Limited.
‘‘This economic recession has affected us in so many ways especially with profitability. Cost is going up, power, diesel, gas and energy cost has gone up. Our N50 gala is now smaller because consumers say they must pay N50, if it is not N50, they will not buy. So, for us to remain in the market, we have to reduce the size,’’ said Joan Ihekwaba, General Marketing manager, UAC Foods Limited.
The International Monetary Fund (IMF) forecasts that Nigeria’s GDP will contract by 1.80 percent in 2016, the worst fall in 25 years.
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