Nigeria’s consumer environment
Over 10-12 February, Renaissance Capital hosted its 5th Annual Pan-Africa 1:1 Investor Conference, in Lagos. Most of the Nigerian consumer companies we spoke to at the event continued to complain of a constrained consumer environment in the country – citing the familiar reasons of the removal of the fuel subsidy in 2012, unrest in the north, increased import tariffs on grains, flooding in 2H12 and slowing governmentspending growth. That said, volume growth appears robust although consumer price-sensitivity is the key challenge. The companies remain upbeat about the longer-term potential of the Nigerian consumer. Nestlé Nigeria remains our top pick in the sector, given what we regard as its superior execution in the market, its consistent profit growth and its longer-term growth potential from the infrastructure it has built in the country.
• Nestlé Nigeria predicts YoY revenue growth of 14-15% in FY13. In 1H13, the increased the price of its Maggi stock cube, which resulted in a decline in the margin distributors could earn on the product. As a result, volumes came under pressure in the product. Nestlé reacted quickly to correct the situation, and it reports that volume growth has normalised in 2H13. Revenue growth in 2H was 18-19%. It appears Nestlé does not believe consumer income is shrinking in Nigeria, given that it has awarded above-inflation salary increases.
It maintains a very positive outlook for the Nigerian consumer, believing annual volume-growth potential of 10-15% is achievable over the next 10 years. Nestlé Nigeria is prepared to sacrifice operating margin in order to ensure volume growth and market-share maintenance. We note that it will not have to increase marketing spend to the same extent as Unilever has, as it is already ahead of the latter in this regard. The company’s biggest concern in the short term is potential naira depreciation, specifically given rand and Turkish lira depreciation and the approaching appointment of a new governor at the Central Bank of Nigeria. In the company’s view, currency weakness will likely result in interestrate hikes, which could have a negative impact on suppliers and distributors. In our view, Nestlé Nigeria’s competitive strength lies in distribution, where it provides its distributors with credit and other support.
• Unilever Nigeria sees the consumer environment in the country as very challenging at present. It notes an increase in unrest in the north in 2012 that hampered its business in the region. In addition, it cites a number of smaller players that are very competitive; and that it is losing market share in home and personal-care products (HPC), due to customers trading down to cheaper alternative products and competitive activity from Procter & Gamble. Unilever’s new distribution warehouse at its manufacturing facility is now operational, and it expects cost savings in 2014 of EUR2.5mn. The company has 75 activedistributors. It does not provide credit to these, although discussions around trade rebates are on the table. Unilever sees Nigeria as its second-fastestgrowing region, behind Bangladesh, expecting double-digit volume growth over the next few years. Further penetration in the north of Nigeria and the recruitment of distributors in white spots are seen as its main growth opportunities. It regards unrest in the north as its biggest threat.
• Renaissance Capital