The stagnant profit of Nigeria’s largest Fast Moving Consumer Goods (FMCGs) companies is the latest sign of how Africa’s largest economy is gasping for breath.
BusinessDay’s analysis of the financial statements of Nestle Nigeria, Dangote Sugar, Cadbury, Unilever, and NASCON reveals that their cumulative profit after tax for the period ended March 2021 was N21.43 billion, a mere 6 percent increase from the N20.24 billion realised in the same period of 2020.
A profit growth of 6 percent when inflation is in double digits is hardly any real growth. FMCG firms are battling slow sales and rising costs due to weak consumers purchasing power and rising cost of raw materials. The pandemic made a bad situation worse for the Nigerian economy where average incomes have declined every year since 2015, and inflation has been accelerating rapidly.
Tajudeen Ibrahim, senior vice president and head of research/strategy at Chapel Hill Denham, says the inflationary pressures being experienced by consumers weakened their pockets and constrained their purchasing power.
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Manufacturers have also decried the rising cost of production that has increased significantly, as raw materials have become more difficult to access.
“Locally, raw materials are not readily available due to issues around insecurity in regions where agricultural raw materials are sourced. For importers, the naira devaluation has made imports more expensive,” Ibrahim explains.
The cost pressure on the manufacturers is intensified as they are unable to pass the entire cost increase to already battered consumers.
The trend of sluggish profit growth may be sustained in the short term if the situation remains unchanged.
Although the 6 percent growth recorded in Q1 2021 is better than the 14 percent contraction recorded in the same period of 2020, it is still some way off from the growth recorded before the pandemic.
The companies analysed posted a combined profit of N15.7 billion in 2017, which was a 23 percent increase from the N12.8 billion recorded in 2016, and in 2018 and 2019, their combined profit jumped by 22 percent.
By 2020, their combined profit contracted by 14 percent to N20.2 billion, a movement that was primarily caused by the outbreak of the COVID-19 pandemic.
Wale Olusi, head of research at United Capital, says FMCGs experienced nominal growth in Q1 due to the weak purchasing power of consumers, which led to a decline in sales volume, adding that the companies faced cost pressures.
Olusi, like Ibrahim observes, states that one of the direct causes of this performance was the naira devaluation.
“Although the economy is tough now, as it recovers we expect that things will get better. However, the government can aid a faster recovery by easing up the business environment and fixing the currency problem,” Olusi says.
The cumulative revenue of the companies analysed however rose the most since 2018, in the period between January and March 2021. The companies posted combined revenues of N191 billion from N144 billion in the same period of 2020, representing a 32 percent increase.
Prior to this, in 2020 the revenue grew by a mere 1 percent. In 2018, there was a contraction of 6 percent, moving from N155 billion in 2017 to N146 billion. By 2019, revenue contracted by a marginal 1 percent, achieving N143 billion.
Jide Babatope, an analyst, says the direct and operating cost of these firms increased significantly, eating deep into their revenue, which caused the slow growth in profit, as in Nestle Nigeria, whose cost of sales rose from N38 billion in Q1’20 to N52 billion in Q1’21.
“The FMCGs were confronted with high operating costs during this period following the persistent inflationary pressure and FX illiquidity. Companies with huge profit decline must have experienced a double whammy of fragile revenue growth and escalated cost level,” he explains.
The impact of rising inflation and FX devaluation seemed to be profound on Cadbury and Unilever, making them cost-inefficient, as they experienced a 62 percent and 144 percent decline, respectively, in their profit after tax for the period under review, he points out.
Giving an outlook for Q2, Babatope says, “The second quarter of 2020 was when the national lockdown came into force and many FMCGs posted poor results. But in Q1 ’21, there has been an improvement in economic activities, which have supported earnings performance of these firms. Thus, we should expect an improvement in the Q2’21 results of these firms.”
While Nigerians get poorer with a 40 percent poverty rate and more miserable with 50.48 percent, Nigeria’s economy remains fragile as GDP grew by 0.11 percent in the fourth quarter of 2020, after two consecutive contractions according to the National Bureau of Statistics (NBS).
Analysts project that if macroeconomic conditions do not improve, the limp performance may be sustained, especially as the companies struggle to retain consumer loyalty.
“To reverse the trend, policies to grow the economy and put money in the hands of Nigerians is a must, the country must address issues of unemployment now at 33.3 percent and at the same time ensure policy costs do not exceed benefits to households and businesses,” Mobola Adu, economic analyst, GDL Nigeria, says.
