During the recession of 2016, consumer goods companies were grasping for breath from not being able to source dollars to import raw materials, plant and machinery to meet production. Consequently, some multinationals exited the country while some local producers closed shop.
The plights of operators in the industry are mounting as a hike in fuel price and a high inflationary environment has dealt a great blow on consumer wallets.
To further exacerbate the already anaemic situation of companies is the menacing gridlock at the Apapa ports that causes disruption in production.
Amid the torrid operating environment, Cadbury Nigeria Plc has been thriving, delivering a higher return to shareholders.
The company’s strategy is a model for rivals to emulate and magnify earnings. In order to woo consumers, Cadbury redesigned and modified its products, while at the same time strengthening its distribution channels, so that products reach more customers across the country.
For instance, Cadbury re-launched its iconic cocoa beverage drink, Bournvita, with a new improved taste, in with its consumers’ taste and preferences.
Cadbury Hot Chocolate 3-in-1 brand, its treat portfolio, recorded substantial growth, driven by its unique offering.
Diversified product base underpins revenue
The consumer goods company released its half year (2019) result showing a modest growth in revenue of 10.14 percent to N19.45 billion from N17.55 billion as at June 2018.
The improvement in revenue was driven by beverage sales (contributed 63.3 percent to revenue), climbing by 19.4 percent year on year (yoy) and confectionaries (contributed 26.2 percent to revenue) which improved by 15.1% yoy while intermediate cocoa sales (contributed 10.5 percent to revenue), falling by 27.3 percent.
Cadbury’s cost control strategies have yielded fruit as its input costs are lower than inflation rate while it is spending less to produce each unit of product.
Cost of sales increased by 3.87 percent to N15.31 billion in June 2019 from N14.74 billion in June 2018. The growth in cost of sales is lower than the 11.22 percent July inflation figure.
The slight increment in cost is due to higher cocoa prices between April and July, a period when cocoa’s yield is seasonally low in Nigeria as the company is fully reliant on local sourcing of cocoa for production of beverage.
Total operating expenses were up 12.16 percent to N3.30 billion in the period under review as against N2.94 billion the previous year. The growth in operating expenses was driven by higher marketing and administrative expenses.
Cost control drives margins
Cadbury has managed direct costs attributable to projects more than rivals. For instance, its gross profit increased by 47.21 percent to N4.14 billion in the period under review.
That compares with Nestle Nigeria’s gross profit expansion of 18.83 percent, International Breweries 11 percent, HoneyWell Flour Mills 6.82 percent, while Unilever, Dangote Sugar, Dangote Flour, and Nascon Allied Industries suffered gross margin contraction due to lower volume growth that crimped revenue.
Cadbury’s gross profit margin increased to 21.28 percent in the period under review as against 16.02 percent the previous year, thanks to improved operating efficiency amid a tough and unpredictable macroeconomic environment.
The Nigerian consumer goods giant also recorded the largest gross profit expansion among peer rivals, and analysts expect that cost pressures will moderate in the second quarter, hence, adding impetus to future gross margin.
Cadbury’s EBIT margin increased to 4.56 percent in the period under review from 1 percent the previous year, thanks to growth in net revenue, good cost control and strong productivity.
Net margins, which shows the extent to which a firm has turned each naira invested in sales into higher profit, increased to 3.44 percent in the period under review as against 2.41 percent.
Operating profit stood at N888.77 million in the period under review, from a loss position of N105.63 million it recorded last year.
Profit after tax was N669.93 million in the period under review as against a loss of N423.76 million the previous year.
Cadbury has no debt in its capital structure, a low gearing position that gives it the leeway to tap the debt market for capital. Such capital could be used to fund future expansion plans such as the purchase of more equipment and acquisition of latest technology to bolster efficiency.
Fixed asset turnover ratio has improved to 150.70 percent in the period under review from 64.60 percent the previous year. A higher ratio means the company has utilized its fixed assets in generating higher revenue, profit, and increased return on equity.
Cadbury’s shares are trading at price to earnings ratio of 10.0 times, which means its shares are attractive to investors that crave for a bellwether firm.
The Nigerian consumer goods giant has a dividend yield of 2.35 percent as at Monday, as it continues to reward shareholders from distributable profit.
It paid total dividend of N471 million for the financial year ended December 31, 2018, in line with its current efforts to create more value for investors.
While Cadbury has been able to deliver higher returns to shareholders, it operates in a harsh and unpredictable macroeconomic environment.
Consumer goods firms in Africa’s largest economy can no longer pass on high input cost to the already beleaguered consumers that have refused to open their purse strings.
An increase in fuel prices and high inflationary environment dealt a blow on consumer wallets, leaving Nigerians impoverished.
Post-recession, growth in real household consumption peaked at 3 percent in the final quarter of 2017, before falling to 1 percent in the second quarter of 2018.
Nigerians are getting poorer as over 50 percent of a population of 200 million live on less than $1.98 dollars a day, as the country overtook India to become the world’s poverty capital.
The road to higher margins and profitability for the firms appear to be increasingly uphill as economic recovery has been sluggish since the country existed a recession in the third quarter of 2017.
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