• Monday, June 17, 2024
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BusinessDay

Logistics business loses steam on surging prices

Strengthening Nigeria’s distribution system to transform the digital economy

Rising inflationary pressures in Africa’s biggest economy is squeezing third-party logistics companies whose business model gained traction during the COVID-19 pandemic.

According to logistics players who spoke with BusinessDay, the country’s inflation rate, which is at a 17-year high, has increased the cost of doing business, translating to high delivery cost for cash-strapped consumers.

This is slowing down the growth of an industry that is creating jobs in an economy where unemployment is at an all-time high.

“The logistics business strives on volumes. But the cost of doing business has increased, making people unable to make enough volumes to break even in the business,” Amanda Etuk, one of the co-founders of Messenger.ng, said.

She said during the pandemic in 2020, she made money from her side hustle of teaching people the business of logistics. “A lot of them ran to logistics then, but now, that hype has gone down as people are now running to informal trade,” she added.

Bolaji Beckley, chief executive officer at Agility Eko Logistics and Agility Express International, said the situation in the economy and the stress from dispatch riders made him cut off the dispatch segment of his business. “I only deal with express delivery and cargo now.”

The Russia-Ukraine war, which started in February last year, led to a sharp increase in energy prices, especially that of diesel. The country’s inflation rate quickened for the 10th consecutive time to 21.47 percent in November from 15.60 percent in January, according to the National Bureau of Statistics.

The World Bank, in its latest Nigeria Development Update for December 2022, said the country’s inflation growth eroded the N30,000 minimum wages by 35 percent, widening the poverty net with an estimated five million people in 2022.

“Inflation has surged to 21.47 percent in November, pushing as many as five million more Nigerians into poverty since the start of 2022,” it said.

Olamide Adeyeye, a Lagos-based human development researcher, said the middle class of the economy, from where logistics businesses get most of their customers, is shrinking as many are falling into the poverty gap.

“They are now heading towards what they can afford and not what they want. And this will impact the industry. It is not really an essential one but more of convenience,” he said.

Adeyeye added that the low demand is not good for e-commerce as logistics is a major missing link in the sector.

“Transportation is one way to get products to the last mile customers. But if organisations in that space are folding up, then what that means is fewer jobs,” he said.

The average delivery cost, which has risen to about N1,000-N2,000 from N500 in 2020, depending on the location within a state, has made consumers seek alternatives like gift cards during the festive period.

“There was a surge in gift card sales from corporates during the last quarter of the year, especially in December,” Olaoluwa Samuel-Biyi, co-founder of SureGroup, said.

He said hampers and other physical gifts lost their lustre because of the rising costs of products and delivery services.

In 2020, the Federal Government enforced lockdown measures and restrictions to curb the spread of the COVID-19 virus. The measures dislodged several businesses but for some small businesses, it was an opportunity to reinvent and stand on the shoulders of e-commerce, a business model that lets firms and individuals buy and sell things over the internet.

“While other sectors were shrinking, pandemic increased the growth of the sector due to our reliance on imported goods and people’s preference for online shopping in areas such as food, toiletries, clothes, electronics and gadgets, furniture, etc.,” said Festus Okotie, chief executive officer at Bernard Hall Nigeria Limited.

He said it made the sector to maximise available opportunities in public-private partnerships within the sector.

Read also: Trends that will shape logistics and global supply chains in 2023

Ken Research, a research-based management consulting company, estimates that Nigeria’s logistics industry will reach $1.5 billion by 2025, basing its projection on Lekki Port, rail infrastructure and improved infrastructure.

Before the pandemic fast-tracked the growth of logistics business, it experienced slow growth for many years due to poor infrastructure, unfavorable custom procedures, high traffic congestion, stale policies, bad roads, insecurity and increased corruption, among others.

These challenges made some e-commerce platforms like LX, Effiritin.com, Dealdey, Gloo.ng, Buyam.com.ng, Cribpark, Gingerbox, Buyrightafrica.com, to either exit the space or move to another line of business.

A 2018 Logistics Performance Index by the World Bank said Nigeria ranked among the lowest at 110th out of 116 countries, putting it below other African countries like Kenya, Ghana and Cameroon.

BusinessDay had reported in 2020 that the number of logistics businesses, which rose by 20-40 percent in August 2020 from March, were being extorted by louts who claimed to represent Local Council Development Areas in Lagos.

“The extortion has always been there but it intensified because of the pandemic,” Benedict Philips, a former logistics player, said. She said she has since stopped the business as it was too stressful to handle.