The continued rise in input cost and the ongoing Russia-Ukraine crisis has brought about an increase in the local sourcing of raw materials and intensified the backward integration plans of fast-moving consumer goods (FMCG) firms in Nigeria, reports have shown.
According to a 2022 report by Afrinvest on the Nigerian consumer goods sector, the Russia-Ukraine crisis has elevated commodity prices, the impact of which has been majorly felt by import-dependent countries like Nigeria.
Consequently, FMCG firms have been hit by high agricultural commodity prices and difficulty in sourcing foreign exchange for raw materials which disrupt the production process.
“To this end, backward integration or local sourcing of raw materials has taken centre stage to curb production distortions and high cost. The CBN has backed producers with supporting projects and funds targeted at boosting local production under its Anchor Borrowers Programme and Seed Multiplication project,” it said.
MAN’s CEOs Confidence Index, which measures changes in the pulse of operators and trends, revealed that the business environment in the second quarter of 2022 was more challenging than the previous quarter.
The report highlighted numerous challenges faced by manufacturers which intensified during the review period such as FX shortage, rising global inflation, erratic power supply and surging cost of alternative energy, scarcity of inputs, and supply cuts.
Frank Onyebu, chairman of Manufacturers Association of Nigeria (MAN), Apapa branch told BusinessDay that as manufacturers struggled to operate, they adopted appropriate survival strategies and adjustments, especially for raw material sourcing and energy source.
“Some manufacturers have started sourcing for inputs locally, many of them are eyeing gas generators too,” he said.
BusinessDay analysis of six listed FMCG firms (Nestle Nigeria, Dangote Sugar, Cadbury, Unilever, and NASCON) reveals that the operators cumulatively spent N287 billion on raw and packaging materials, which was a 30.35 percent increase from the N220 billion spent in the same period of 2021.
Further analysis revealed that in the first half of 2022, raw materials and packaging cost gulped 57.52 percent of their cost of sales amid rising energy cost as well as other administrative and operating costs.
During the review period, the cost of sales of the firms was N499 billion, which was a 31.8 percent increase from the N378 billion spent in the first half of 2021. However, their revenue grew by 31.9 percent to N758 billion in 2022 from N446 billion in the corresponding period of 2021.
Some notable companies that actively engage in local sourcing include Nestle Nigeria, which sources 80 percent of its maize, sorghum, millet, soya, cassava starch, cocoa powder, and palm olein from more than 41,600 local farmers and processors scattered across the country and has over 30,000 farmers who supply 100 percent of the grain requirement for Golden Morn Maize.
Dangote Sugar is pumping billions of dollars in sugarcane plantations across northern states to enable it to cut raw sugar imports. The sugar maker’s $700 million project in Nasarawa State is expected to see its plant in Tunga, Nasarawa State, producing 450,000 metric tons and generate 90 megawatts of power annually when completed.
Beyond the increase in local sourcing of raw materials, FMCG firms are also making huge investments in line with backward integration activities.
For example, Flour Mills of Nigeria announced its acquisition of an additional 5,200 hectares of land at Sunti, which expanded the total land size of Sunti Golden Sugar Estates to 22,000 hectares.
Olam said its subsidiary Crown Flour Mill Limited launched a N300 million ($750,000) 10-year project to set up community seed enterprises for Nigerian farmers to increase their production of wheat.
According to Afrinvest, the continuous investment by domestic players in the industry through backward integration programmes would help increase local production capacity.
“Although significant progress has been made in this regard, major backward integration projects are still stalled by funding, low yield, and other agricultural sector challenges,” it stated.
Jide Babatope, Lagos-based analyst, said the acute shortage of foreign exchange for importation of manufacturing raw materials and the fast depreciation in the value of the naira, also prompted manufacturers to look inwards for raw materials.
Currently, it costs N430 to get one dollar from the Central Bank of Nigeria (CBN), while it costs no less than N700 in the black market, giving a difference of over 62 percent.
“If not for the worsening insecurity and other issues, many companies will be actively involved in sourcing raw materials locally, however, we still have some of them that are taking the risk,” he said.