Nigerian businesses are struggling to stay afloat as operating costs continue to surge amid shrinking consumer spending.
Africa’s most populous country has been grappling with double-digit annual inflation since 2016, with the consumer price index hitting 20.7 percent in September – a 17-year high, according to the National Bureau of Statistics.
Globally, countries are faced with rising energy and food costs, largely driven by the Russia-Ukraine war. But in addition, worsening insecurity in Nigeria and climate change have compounded the problem for businesses.
Diesel prices have soared by over 100 percent from this year, raising costs for firms in Nigeria, where businesses rely on diesel-fired generators amid unstable grid electricity.
Transportation costs have also doubled, putting additional pressure on businesses.
BusinessDay analysis of the financial statements of some fast-moving consumer goods (FMCG) firms showed that the amount spent on transportation rose to N43.19 billion in the first half of 2022 from N33.79 billion in the same period last year.
NASCON Allied Plc’s transport cost soared by 57.98 percent. The cost of transport for Nestle increased by 20 percent, while that of Unilever Nigeria Plc surged by 57.84 percent. Cadbury Nigeria Plc saw an increase of 7.62 percent in transport cost while that of Dangote Sugar Refinery Plc rose by 27.72 percent.
BusinessDay analysis of the financial statements of major FMCG firms shows high inventory levels in the first half of 2022.
Nigerian Breweries recorded the highest inventory level of N82 billion while Nestle, Dangote Sugar, and Guinness had an inventory level of N72.7 billion, N63.8 billion, and N32 billion respectively.
The major factors driving the increase in production cost include FX shortage, rising energy cost, global supply cut causing raw material scarcity.
FX availability and accessibility have remained challenging for manufacturers. The naira has continued to depreciate against the dollar in the official and parallel markets in recent months, dropping to as high as 440/$1 and 750/$1 respectively.
The unfavorable exchange rate has increased production costs significantly because not less than 40 percent of raw materials, machines and other inputs required for production are sourced using FX.
Local sourcing of input, which should serve as an alternative, is low due to rising insecurity in some parts of the country. Manufacturers also say that locally sourced raw materials tend to have lower quality.
Read also: Businesses tasked on corporate governance
Energy is a key element of the production process; however, Nigeria’s inability to supply and distribute sufficient electricity has left manufacturers at the mercy of alternative energy sources such as the use of generators that consume diesel and petrol, which takes 40 percent of the total production cost, according to the Manufacturers Association of Nigeria.
Beyond the issue of rising production costs, the marketing and distribution expenses of these firms have surged significantly.
The worsening macroeconomic conditions in the country have hurt the sales of these firms, especially as they are forced to increase the prices of their products, causing a shift in consumers’ loyalty to cheaper brands.
Jide Babatope, a Lagos-based economic analyst, said FMCG firms are faced with the dilemma of either absorbing the rising cost without hiking their prices, which will affect their profit, or hiking prices to contain cost pressures, which will dampen the demand for products.
“The current economic terrain does not augur well for most FMCG firms in terms of rising operating costs due to supply cut, energy costs and FX pressure. Although big FMCG players can afford to raise prices of their products while still maintaining market share, the small and medium-scale players are more disadvantaged,” he said.
