Kehinde Folorunsho, a partner with Kreston Pedabo is a fellow of both the Institute of Chartered Accountants of Nigeria (ICAN) and the Chartered Institute of Taxation of Nigeria (CITN). In this interview with IFEOMA OKEKE-KORIEOCHA, he discussed the challenges facing the Fast-Moving Consumer Goods (FMCG) sector in Nigeria and the many steps to addressing the challenges. Excerpts:
Nestlé Nigeria Plc, Dangote Sugar, International Breweries, Cadbury, Champion Breweries, Guinness Nigeria, and Nigerian Breweries in their 2024 half-year financial statements revealed a combined loss before tax of N818.3billion. What are the implications of this development for the Nigerian economy and the FCMG sector?
In my opinion, the Fast-Moving Consumer Goods (FMCG) sector is a vital and dynamic market in Africa, providing essential goods such as food, beverages, personal care items, household goods, and toiletries. Its significance extends beyond meeting everyday needs, as a decline in this sector could have far-reaching consequences for Nigeria’s economy. Given this backdrop, I believe that the financial performance of major Nigerian corporations like Nestlé Nigeria PLC, Dangote Sugar, International Breweries, Cadbury, Champion Breweries, Guinness Nigeria, and Nigerian Breweries has a profound impact on the Nigerian economy. Recent government policies, including the full deregulation of the petroleum industry and harmonisation of foreign exchange rates, have significantly increased production costs and reduced profit margins for businesses in Nigeria, particularly in the FMCG sector. As a result, the half-year financial statements of major FMCG entities have reported a combined loss before tax of N818.3 billion, primarily due to these policies.
This substantial loss is alarming, as it may reduce economic growth, especially since the FMCG sector contributes significantly to Nigeria’s GDP. If this trend continues until the end of the financial year 2024, it may lead to downsizing and massive job losses in the sector, which may potentially affect over 50,000 employees, increased poverty levels, with an estimated 200 million Nigerians relying on the sector for livelihood, and reduced government revenue, which may impact essential services and infrastructure development.
From the sector’s perspective, this substantial loss may discourage potential investors, and as such prevent these FMCG Companies from accessing capital. I believe that the reported losses are a troubling sign for the Nigerian economy, particularly for the FMCG sector. If left unaddressed, this could have a ripple effect on employment, consumer spending, and investor confidence in the country. Urgent action is needed to address these challenges, including policy reforms and support for the FMCG sector, to prevent far-reaching consequences for the Nigerian economy.
What do you expect in the second half of the year? Are there signs that things will be different?
Well, I think the Nigerian FMCG sector is prepared for a cautious recovery in the second half of 2024, following a challenging first half marked by declining revenues and profitability. While the sector’s growth prospects remain promising, driven by a large and growing consumer base, I believe that several factors will influence its performance in the latter part of the year. On the positive side, FMCG Companies have been implementing aggressive cost optimisation strategies, debt restructuring campaigns, and capacity expansion initiatives, which are expected to yield benefits in the second half. I also think that the sector’s resilience and adaptability, enhanced during previous economic downturns, will help Companies in this sector to navigate the challenging operating environment. The commencement of production at the Dangote refinery which is expected to lead to increased PMS supplies and the slight improvements in electricity supply, are also positive developments to watch out in the second half of the year. However, lingering challenges, such as high operating costs, foreign exchange volatility, and intense competition, will continue to exert pressure on the FMCG sector. The recent 55-60% increase in PMS pump prices will likely further reduce consumer spending and purchasing power, and as such negatively impacting demand for FMCG products. Diesel prices, a significant component of operating costs, are expected to remain elevated, thus, further straining profit margins.
To relieve these challenges, FMCG Companies may explore innovative pricing strategies, product offerings, and distribution channels to maintain market share and drive growth. Collaborations and partnerships within the industry could also become more prevalent, hence enabling Companies to share resources, expertise, and risk.
What are suggestions to the government in managing some of the shocks the sector is facing, especially foreign exchange crisis, inflation and lending rate?
To address the challenges facing the FMCG sector in Nigeria, I would recommend a multi-faceted approach. Firstly, the government should implement policies to stabilise foreign exchange rates, such as introducing a foreign exchange stabilisation fund, to cushion the impact of currency fluctuations on import costs. Secondly, measures should be taken to increase access to affordable credit for FMCG businesses, such as reducing lending rates, increasing loan tenors, and providing sector-specific lending programmes.
Furthermore, investing in critical infrastructure, including roads, ports, and logistics facilities, would enhance the sector’s competitiveness and reduce costs. Tax incentives and subsidies could also be offered to encourage local manufacturing and reduce reliance on imports.
Streamlining regulatory processes and reducing bureaucratic hurdles would help create a more conducive business environment. This will enable FMCG companies to operate efficiently and effectively. What implications do you see for the banking sector in terms of debt repayment and also for the GDP?
The banking sector is likely to experience a surge in Non-Performing Loans (NPLs) and a significant contraction in lending to the FMCG sector, which may result in substantially higher provisions for potential loan losses and a decline in profitability. Moreover, the far-reaching challenges facing the FMCG sector may cause a ripple effect throughout the broader economy, leading to a decline in consumer spending, decreased economic activity, and intensified inflationary pressures, which may also have impact on GDP growth. Furthermore, the uncertainty and challenges affecting the FMCG sector may discourage investment, both domestic and foreign, and could potentially lead to a decline in GDP growth.
How can the FCMG sector work on their operational strategies for enhanced cost efficiency?
To navigate the current challenges and drive cost efficiency in Nigeria’s FMCG sector, I think Companies can leverage local insights and adapt global best practices. This includes streamlining logistics and distribution networks to mitigate the impact of recent government policies and navigate the country’s complex transportation landscape. In addition, if digital technologies can be harnessed, it could enhance route-to-market strategies and improve operational efficiency. In response to recent policy changes, we have seen some FMCG Companies that have successfully reengineered their products, by reducing the product sizes while maintaining quality and prices to ensure break-even and remain competitive. Others are exploring innovative packaging solutions that cater to the local market’s unique needs. It is expected that other players in the FMCG sector would adopt these strategies so that they can attain profitability, preserve market share, and continue to deliver value to their customers despite the prevailing market conditions.
