BusinessDay

Local inputs, others seen driving down FMCG firms’ costs

As companies in Nigeria’s fast-moving consumer goods (FCMG) sector are facing up to rising costs, experts have highlighted the need for operators to source inputs locally and redesign their product portfolios, among other measures, to reduce expenses.

BusinessDay gathered that the continued rise in the production cost of manufacturing companies, especially those in the FMCG segment, was affecting profitability, product quality, and consumer demand.

Most manufacturers have had to increase their retail prices while maintaining the same value or, in some cases, reducing the value of their products.

Alfred Olajide, the managing director of Coca-Cola Nigeria Limited, while speaking at a virtual event on Thursday, lamented what he described as the “exponential increase in costs and limited ability to pass it to consumers, who are also under pressure.”

“For example, this year alone, an average sugar cost has gone up by 20 percent, plastic resins have more than doubled in terms of prices, aluminium bodies, cane bodies are up by almost 100 percent. And this is in addition to all the challenges of poor infrastructure, supply chain disruptions and logistics,” he said.

Nigerians saw the inflation rate jump to a record high of 18.17 percent in March last year as prices of goods rose amid the economic fallout of the COVID-19 pandemic.

A 70g of Superbite sausage roll, which was sold for N50, was reduced to 60g, but its price increased to N60; the price of a 5ocl Coca-Cola drink increased from N100 to N200, while the price of a loaf of bread increased from N250 to N500.

“Last month, I ordered pizza for my children at the usual price, but the pizza was smaller and it did not have the usual chicken or meat toppings, sources, and other things that make it attractive and appealing. I was disappointed because I did not get value for my money,” a mother of two, who simply identified herself as Damilola, said.

Read also: Nigerians feel pinch as soaring costs hit FMCG firms

Within a period of six years, the Nigerian economy slipped into a recession twice owing to the collapse of oil prices, the latest was induced by the COVID-19 pandemic in 2020, weakening consumers’ purchasing power, causing job losses, and throwing millions into poverty.

The Manufacturers Association of Nigeria, in its MAN CEOs Confidence Index, said manufacturers’ production and distribution costs increased by 21 percent in the second quarter of 2021, adding that the hike in production costs caused a 29 percent decline in the volume of production.

A BusinessDay analysis of the financial statements of six FMCGs, namely Nestle Nigeria Plc, Dangote Sugar Refinery Plc, Flour Mills of Nigeria Plc, Honeywell Flour Mills Plc, Northern Nigeria Flour Mills Plc, and NASC Allied Industries showed that their combined cost of sales rose by 44 percent for the nine months the period ended September 2021 to N1.17 trillion from N820 billion in the same period of 2020.

The cost increased by 82 percent when compared with the N648 billion spent in the same period of 2019, which was before the pandemic.

In 2021, the firms reported a combined profit after tax of N68 billion, which was a 10 percent decline from the N76 billion achieved in 2020.

Cadbury Nigeria Plc, Unilever Nigeria Plc, and Nigerian Breweries Plc, recorded a collective production cost of N363 billion for full-year 2021, a 22 percent increase from the N297 billion expended in 2020, and a 30 percent increase from N278 billion in 2019.

Before the pandemic, high inflationary pressures, low incomes, and weak purchasing power prompted some companies to repack their products into smaller sachets at affordable prices.

Pascal Odibo, group country director at Jeff & O’Brien Knowledge, Africa, highlighted the need for FMCG companies to find innovative ways to attract more customers.

He said, “For example, taking the products to the customer directly, cutting off middlemen, which sometimes represent a cut in the income of large institutions, or develop 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.”

Uchenna Uzo, faculty director at Lagos Business School, said, “If prices need to go up and organisations are not matching the prices with an increase in value, at the end, it will be a ticking clock for them.

“What that means is that sooner or later, they will notice that people are shifting to other brands that are nurturing their value needs.”

According to him, FMCG companies can either offer the small value in smaller quantities or offer the same value but add freebies.

“This will make customers appreciate that you have taken a step forward to show that you care for them. Also, how the price increase is communicated is also
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,” he said.

According to Jide Babatope, a Lagos-based analyst, one way FMCG companies can cut the rising costs is to intensify efforts on local input sourcing, which seems to be more cost-effective than importing raw materials.

He said, “FMCGs product portfolios are elastic in nature, meaning the kinds of products they manufacture have many substitutes; hence, these companies can redesign their product portfolios into cheaper and more affordable brands while being intentional about quality.

“Big FMCG players can afford to raise the prices of their products while still maintaining market share because of their brand reputation and a sizeable chunk of their customer base are value brands, but smaller businesses are more disadvantaged.”

Ibrahim Tajudeen, head of research at Chapel Hill Denham, stressed the need for FMCG companies to maintain quality and ensure that consumers get good value for money.

“Otherwise, they will run to alternatives. Consumer taste is very important in my view. But in trying to cater to consumer taste, manufacturers should come up with strategies that will make sure that people are able to get something for the size of their pocket.”

Ayorinde Akinloye, an analyst at United Capital Plc, said most FMCG companies were stuck between maintaining product quality and increasing the prices of their products.

He said, “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 products and let their margins suffer a bit.”

Get real time updates directly on you device, subscribe now.