• Thursday, May 23, 2024
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Small businesses struggling to survive as energy bills rise

Small businesses struggling to survive as energy bills rise

By Eniola Olatunji and Zainab Aderounmu

For Adekunle William, chief executive officer of Dr Stitches Clothiers, the continuously rising energy costs are squeezing his business.

High energy costs have tripled, forcing him to rely heavily on his generator, which is gulping down diesel at exorbitant prices, eating away his already thin profits.

Adekunle is not alone in this challenging period. Across Nigeria, countless small businesses were facing the same brutal squeeze, wondering if they could keep their dreams alive.

For Dr Stitches Clothiers, a ready-to-wear business, energy costs alone raised production costs by 200 percent.

“I run a fashion house and heavily rely on electricity to sew bespoke fashion pieces, but the poor electricity supply greatly reduces my productivity. Of course, I have to turn to a generator, so I spend more on buying diesel for my generator,” Adekunle said.

Read also: More than half of private businesses may shut down on electricity tariffs hike – Organised private sector

Energy is a key element of the production process. Nigeria’s inability to supply and distribute sufficient electricity has left businesses at the mercy of generators powered by diesel or fuel, whose prices have surged in recent months.

Last year, the president announced the removal of fuel subsidies, and this is causing further spikes in the prices of goods and raising production costs for businesses.

The price of diesel, the lifeblood of industries reliant on heavy machinery, has surged by 380 percent from an average of N312 in January 2022 to an average of N1,500 as of the time of writing.

This raises the production costs for manufacturers significantly and forecloses their chances of competing with international peers.

The price of diesel, the lifeblood of several businesses, has surged by 380 percent from an average of N312 in January 2022 to an average of N1,500 as of the time of writing. Petrol pump prices have surged above N630 per litre.

This raises production costs for businesses significantly and forecloses their chances of competing with international products.

Chidinma Okoli, a tigernut trader, says the cost of cooling and preserving her tigernut drinks has doubled since the subsidy removal, and this has wiped off most of her gains from the business as consumers are not willing to pay more for her products.

“I make a profit of N158 on a bottle, which means on 12 bottles I get N1,896. For each batch, I prepare 60 bottles; that’s five packs, and my expected gain should be N9,480,” she explained.

“The fuel to run my generator is 650 per litre. I buy five litres daily, and that alone has wiped out the gain on two packs, let alone running it till the batch finishes,” she noted.

Okoli said that she augments the drink business by selling snacks alongside it and can make little profit.

As though the subsidy was not already a thorn in the flesh for SMEs, last week the federal government reviewed the electricity tariffs of some users, increasing them by over 300 percent.

 “Nigeria’s inability to supply and distribute sufficient electricity has left businesses at the mercy of generators powered by diesel or fuel, whose prices have surged in recent months.”

The price was hiked to N225/kWh from N68/kWh for customers under the Band A feeder, who are offered at least 20 hours of electricity per day.

Fisayo Adelowo, a confectionery maker who works from the comfort of her home in Ojodu, will now have to ration her light usage due to the exorbitant price.

“I produce a lot of confectioneries daily, some of which need power to sustain them. Between service charges and diesel costs, I already pay quite heavily; combining this with the new tariff is a lot,” Adelowo said.

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“I’ve resorted to rationing the power supply to only a few hours per day,” she said. To ensure sustainable power for her business, she also invested in solar power generation.

“Despite being a premium customer, we still don’t get as much power as we should. It’s a crazy time for businesses; imagine having three forms of energy just to get by,” she lamented.

Access to electricity in the country is the lowest globally, with about 92 million Nigerians lacking access to power, according to data from the 2022 Energy Progress Report released by Tracking SDG 7.

The World Bank has also disclosed that businesses in Nigeria lose about $29 billion annually because of the country’s unreliable access to electricity.

Apart from high energy costs, FX availability and accessibility have remained challenging for businesses. Currently, it costs N1,000 to get one dollar from the Central Bank of Nigeria (CBN), while it costs around N1,110 in the black market.

Also, logistics costs amid high borrowing costs and low demand impact business operators.

Similarly, Owoseni, a textile dealer in Lagos, highlighted the impact of sundry expenses like transportation on her profit margin.

“The cost of transportation has affected my business. Yesterday, from Tom Jones, I paid N1,500 to Igbogbo, which means to and fro is about N4,000, which was formerly N2,500,” she said.

She also said that the naira devaluation has affected the quantity of goods and the profit margin.

“The costs have also affected the quantity of goods I can buy. In December, I could buy 100 pieces of lace for N1 million, but now I can’t buy more than 40 pieces for the same amount.

“It has affected sales too. I can go a whole week without sales. I have concluded that what I buy, I will sell. I’ve also reduced the rate at which I go to the market. Maybe once a week,” she said.

Dabiri Olawale, CEO of Dabiri Autos, said, “You see, I’ve been so reluctant to upload available cars because, as an individual, I believe current prices are ridiculous. But on second thought, it’s not getting any better; prices have not reverted down even with a stronger naira.”

“Even as a car dealer, some car prices shock me. I can’t even upload available cars. Somebody sent a Nigerian-used 2007 Avalon to me yesterday for 5 million naira. How much do I want to resell? Murano 2005 N4 Million!.”

Read also: Government new electricity tariff sparks concerns and impact on businesses

The International Finance Corporation (IFC) estimates that 65 million firms, or 40 percent of formal micro, small, and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of global MSME lending.

The CBN recently raised the MPR, the benchmark for the interest rate in the country, to an all-time high of 22.75 percent in its first MPC meeting of 2024, the cash reserve ratio (CRR) to 45 percent, and the liquidity ratio to 30 percent.

Usually, banks respond to MPR changes, according to experts. At the moment, commercial banks charge rates between 30 and 35 percent, according to BusinessDay checks.

With the excessively high rates at deposit money banks, experts say more businesses will be strangulated.

These challenges mean that several MSMEs in Nigeria are forced to rely on personal savings or informal sources of financing, which can limit their ability to grow and scale.

This is especially problematic for businesses that are seeking to expand into new markets or introduce new products or services, as the costs associated with these endeavours can be significant.

How businesses are surviving with rising costs

With the high cost of production, businesses are looking inward to drive down costs and tweak their models to survive the country’s macroeconomic challenges.

The high energy costs, foreign exchange volatility, and accelerating inflation are forcing businesses to source their inputs locally.

Sharon Samo, founder of Adetutu, a clothing brand that manufactures women’s wear and operates in the Lagos metropolitan area, said she has resorted to using local fabrics to cut costs.

“Materials that used to be N1,000 per yard are now sold at N1,500 per yard,” Samo said.

“This leads us to use local materials that are more affordable,” she added.

Paul Akingbola, CEO of Protransl8, a translation agency, and co-founder of Transcript dot NG, a tech startup, has long mitigated his business from FX risk by fixing his prices in dollars.

“One major coping mechanism that comes to mind is to start charging in dollars. This way, whatever happens to the naira doesn’t impact much on my reflections.”

“We also continue to review our business plans and strategy to ensure alignment with operating environment realities.”

Sachetization or smaller packages are on the rise.

Sachetization is now on the rise in Africa’s biggest economy as businesses struggle for survival. Although this is not a new trend, the county’s high inflation rate has forced many to adopt the practice, as weak consumer purchasing power means higher demand.

Sachetisation, a general term for packaging in smaller packs, is the practice of selling consumer products such as detergent, shampoo, liquid soaps, powdered milk, and beverages, among others, in single-use packages.

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Ignatius Akpabio, chief growth officer at TradeDepot, added that with food inflation rising consistently, retailers and consumers have been optimising for what they can afford.

“Many brands are now offering smaller packages of their products or adjusting the size of existing products to accommodate consumer sensitivity to rising prices.”

Akpabio cited a leading chocolate beverage manufacturer that changed the configuration of its 20-gramme packs and brought down the price from N240 in one case to N200.

According to him, the slight reduction in size and price has led to a surge in demand for the product.

“That slightly reduced the price of that product, enabling it to remain its fastest-moving stock-keeping unit on the market. Even though they have larger pack sizes, the smaller packs continue to move significantly faster,” he added.