The rising cost of energy and foreign exchange (FX) liquidity constraints is pressuring the cost of operations of manufacturing companies in Africa’s biggest economy.
The top firms like Dangote Sugar Refinery, BUA Foods, Nascon Allied Industries, Fidson Healthcare Plc, GlaxoSmithKline Consumer Nigeria plc, Dangote Cement, Lafarge Cement, BUA Cement, Guaranty Trust Holding Company (GTCO), and Zenith Bank saw their energy costs rise by 33.16 percent in the first half of 2022 to N207.54 billion from N155.86 billion in the same period last year.
Since Russia invaded Ukraine in February, fuel prices, a major contributor to the rising cost, have soared. The price of diesel in particular has soared nearly 178 percent to N800 per litre from N288 in January, forcing some firms to restructure their production hours, while others completely shut down operations.
Apart from that, the country’s FX challenges have worsened. On September 6, 2022, at the official market, the exchange rate between the naira and the US dollar closed at N435/$1, an increase of 33 percent from 327/$1 in March 2020.
While at the parallel market, it closed at N702/$1, an increase of 90.8 percent from N368/$1 in March 2020.
Before the COVID-19 pandemic, high inflationary pressures, low incomes and weak purchasing power led to companies repacking their products into smaller sachets at affordable prices.
In finding solutions to the problems, BusinessDay interviewed some experts to get tips on how companies can win in this tough economic situation.
Jide Babatope, Lagos-based Analyst
One way they can cut the rising cost is to intensify efforts on local input sourcing which seems to be more cost-effective than importing it abroad.
But this is even a question of how many sub-sectors in the FMCGs space have their inputs readily available in the local markets.
FMCGs product portfolios are elastic, meaning the kind of products they manufactured have many substitutes; hence these companies can redesign their product portfolio into cheaper and more affordable brands while being intentional about quality.
It is also noteworthy that big FMCGs players can afford to raise the prices of their products while still maintaining market share because of their brand reputation and a sizable chunk of their customer base are value brands, but FMCGs and smaller businesses are more disadvantaged.
Uchenna Uzo, consumer expert and faculty director, Lagos Business School (LBS)
If prices need to go up and organisations are not matching the prices with an increase in value, in the end, it will be a ticking clock for them.
And what that means is that sooner or later they will notice that people are shifting to other brands that are nurturing their value needs.
So, what they need to do is to either offer the small value in smaller quantities. But a lot of people might frown at that. So, they can offer the same value but add freebies that customers don’t need to pay for. This will make them appreciate that you have taken a step forward to show that you care for them.
So, product and service bonding, promotions, and different things like that help people know that you care. Also, how the price increase is communicated is important. There are different ways you can communicate an increase that will not make people feel that it is an increase at the end of the day.
Pascal Odibo, group country director, Jeff & O’Brien Knowledge, Africa
Most FMCG are institutions. They structure their business around known costs. These costs are fixed and the people that are buying them are their variables. So, what they need to do is to go to those variables and find innovative ways to deal with them. Dealing with variables will therefore mean how the customers consume that product.
For example, taking the product to the customer directly, cutting off middlemen who sometimes represent a cut in the income of large institutions, or developing new products that will serve the need of their present challenges.
What happens most times is that those people that are supposed to think out new and strategic ways of improving the business don’t enter the mode of superior thinking but cost-cutting.
Ayorinde Akinloye, an investor relations analyst, Seplat Energy plc
Most of them are stuck between maintaining product quality and increasing the price of their product.
At the moment, they are doing the best possible they can in terms of bringing the balance between quality and cost. So, the only thing they need to improve on is to see how they can manage the number of materials they can put in these products so that they can still improve the quality or they increase the quality of the product and let their margins suffer a bit.
Ibrahim Tajudeem, head of research, Chapel Hill Denham
They should maintain the quality and ensure that consumers have the right value for money so that they can buy more of such packages. But those that cannot afford those packages will buy fewer packages and enjoy them upon consumption
For example, if peak milk reduces the quality of their milk, I will look for milk that will give me that same taste. Consumer taste is very important in my view. But in trying to cater to consumer tastes, manufacturers should come up with strategies that will make sure that people can get something for the size of their pocket.
Cheng Fuller, a Lagos-based retail expert
They should look at operational efficiency initiatives. That is how they can reduce their cost of operations or expenses. Then after that, they can now look at alternative sourcing channels and see how to produce at a cheaper cost.