• Wednesday, February 28, 2024
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Five ways Nigerian businesses navigate surging inflation

Four charts show Nigeria is not a rich country

Businesses in Nigeria, especially fast-moving consumer goods (FMCG) firms, have devised several ways of attracting and retaining customers in the face of surging inflation.

The country’s inflation rate, which has been at a 17-year high since July last year, has negatively impacted FMCG firms by increasing their cost of doing business and has also made them more aggressive in rethinking their strategies to stay afloat.

“What inflation clearly points out is that the customer’s capacity to pay is lower than before. And if a business wants to deliver value to that same customer when their wallet is shrinking, it has to step up by knowing how to do things differently,” Uchenna Uzo, a consumer expert and faculty director at the Lagos Business School (LBS), said.

He said there is only so much a customer can bear and that when inflation continues to rise, it suggests that businesses have to be innovative in their pricing strategies.

“A lot of companies and businesses have been using the cost-plus pricing strategy where you just calculate the inflation rate, put the figure and move one. But now, I think they are beginning to think differently about pricing because of the sustained rise in inflation,” he added.

Nigeria’s headline inflation rose for the third straight month in March to 22.04 percent from 21.91 percent in the previous month, according to the National Bureau of Statistics.

“Companies are doing a lot of coping mechanisms against inflation,” Gabriel Idahosa, deputy president of Lagos Chamber of Commerce and Industry (LCCI), said.

“Some of them are reducing the size of their products so that income earners at the lower end can still afford to buy some of their products. And they are also doing a lot of promotional sales and discounts to attract and retain their customers,” he said.

According to Idahosa, companies are doing a lot in the area of slimmer production processes that require fewer people. “They are now automating a lot of processes.”

Read also: CBN to collaborate with risk practitioners for resilient financial system

Here are five ways businesses are navigating the rising inflation:

Local sourcing of raw materials

The scarcity of foreign exchange, a major contributing factor to the rising inflation rate, is forcing manufacturers to source their inputs within the economy rather than from abroad.

A recent report by the Manufacturers Association of Nigeria said local raw materials utilisation in the manufacturing sector rose to an average of 52.8 percent in 2022 from 51.5 percent in the previous year.

“The increase in the local raw materials utilisation in the sector during the period is due to increased difficulty in sourcing forex which compelled manufacturers to look more inward for raw materials notwithstanding the associated huge cost,” it said.

It said it is therefore important for the government to re-evaluate its role in local development and production of raw materials in terms of funding.

Last year, the naira depreciated against the dollar, dropping to as low as 448/$1 from N381/$1 in 2020 at the official market. It depreciated to 740/$1 from N472/$1 at the parallel market.

Apart from manufacturers, retailers are also increasingly switching to local products.

More flavours

Some FMCG companies and manufacturers are expanding their taste segments by pushing out more flavours to entice Nigeria’s youthful population, which forms a large segment of the consumer market.

Golden Penny Foods, a subsidiary of Flour Mills of Nigeria Plc, recently launched a new noodle flavour called Golden Penny Jollof Hot Hot Noodles. Last November, Dufil Prima Foods launched Indomie Jollof Chicken, a new addition to the list of its flavours.

Tropical General Investments Group, makers of Terra Seasoning Cubes, unveiled a new seasoning cube flavour, called Terra Jollof Cube, in February. The new product is in addition to the rest of the company’s other flavours such as beef and chicken.

In April last year, Aspira Nigeria Limited launched four variants of Viva Dish Washing Liquid in different flavours (Original, Anti-Bacterial, Sea Breeze and Zesty Lemon).

An article by Prepared Foods said that flavours create excitement in the market about the offerings as most consumers are interested in trying new flavours of old favourites.

“Flavour is important to everyone because it is a method to partner with your customer. It is an easily understandable pillar with which the consumer, retailer, foodservice operator, manufacturer and grower can identify,” it said.

Gbolahan ologunro, portfolio manager at FBNQuest, said that from a strategy perspective, companies have realised that consumers are price-sensitive and consumption in the economy is generally weak.

“By launching new flavours, from a consumer psychology perspective, there is that behavioural pattern you would expect from people to try out the new flavours,” he said.

Sachetisation or smaller packages

Sachetisation, a general word for packaging in smaller packs, is the practice of buying consumer products such as detergent, shampoo, powdered milk, beverages, etc. in single-use packages.

Many FMCG companies have repackaged their products into smaller units (sachets), making them more affordable in a bid to stay competitive and bolster demand for their products.

Although this is not a new trend, the county’s high inflation rate has forced many to adopt the practice as weak consumer purchasing power means higher demand for food and groceries in smaller packages.

“With inflation being so high, consumers shopped little and often, as this gave them a feeling of more control over their finances. There was also a shift to purchasing smaller pack sizes and kiosks in particular,” analysts at Euromonitor International said in a recent retail report.

Ignatius Akpabio, chief growth officer at TradeDepot, added that with food inflation rising consistently since the start of the year, retailers and consumers have been optimising for what they can afford.

He said everyone is trying to get the best value for their money, which often means buying smaller quantities more often. “Many brands are now offering smaller packages of their products or adjusting the size of existing products to accommodate consumer sensitivity to rising prices.”

Akpabio cited a leading chocolate beverage manufacturer which recently changed the configuration of its 20g packs from 240 in a case to 200.

“That slightly reduced the price of that product, enabling it to remain its fastest-moving stock keeping unit on the market. Even though they have larger pack sizes, the smaller packs continue to move significantly faster,” he added.

Among the brewers, industry players introduced smaller units of 45cl packages in the malt category and “pet lines” for the Spirits category, a recent consumer goods report by Cordros Securities said.

It said food and home personal care producers have also strengthened their positioning in the bottom segment of the pyramid in response to consumers’ growing preference for affordability.

“With consumers’ high level of acceptance, we believe the new wave of “sachetisation” in the consumer goods sector will persist as producers strive to maintain their market share,” it said.

More partnerships with logistics firms

According to Idahosa of LCCI, companies are looking for ways of reducing delivery costs by outsourcing logistics rather than buying vehicles and trucks to move their products.

“They are now doing Uber pay as you go model to save themselves the cost of maintenance of trucks and other costs. So those areas of outsourcing logistics leads to lower cost,” he said.

Last year, Errand360, a bicycle delivery company, entered into a strategic partnership with Jumia Food in Nigeria to offer last-mile logistics services to the company’s customers.

Flutterwave, a fintech company recently partnered with SHiiP to improve deliveries for its stores, small-and-medium enterprises, and large-scale customers and merchants in Nigeria.

The company said through their partnership with SHiiP, its merchants will be able to select from a range of over 50 domestic and international couriers including DHL, FedEx, UPS, Flocargo, Shippo, and Flo Express for the transportation of goods, resulting in cheaper delivery rates.

And Glovo, a major player in the logistics industry which launched in Nigeria in 2021 said it has over 1,500 active partners with 98 percent SMEs and two percent chains including leading local brands such as Gourmet Twist, Citysubs, So Fresh, and Beleful Republic.

More focus on financial health

Uzo of LBS said inflation is making companies sensitive about their financial health. “So, it is no longer enough to have a cash flow situation or profitability analysis that makes you feel that in the next six months you will be ok.”

“What this continuous inflation is offering is that people need an alternative matrix for success when it comes to their financial health. Profitability is ok but you need to also do scenario planning, look at the political landscape and the customers’ willingness to pay that will be evolving as inflation continues,” he added.