Like in 2016, when Nigeria experienced its last economic recession, it is another chance for innovators and savvy entrepreneurs in Nigeria to rise up and ride the country’s latest economic upheaval to glory.
Nigeria has slipped into its second recession in five years as the Covid-19 pandemic upends economies across the globe. Nigeria’s recession is particularly painful as it comes at a time when inflation is on the rise and poverty deepening.
While recessions are more famed for the losers they create from the owner of a business that folds up or individuals who lose their jobs, not everyone loses during an economic recession.
The downturn often throws up rare opportunities for businesses to get ahead of competitors by investing and growing market share when everyone else is cutting back on spending.
Downtrodden economies can also lead to great innovation and creates new and different customer demands, like for cheap entertainment instead of expensive vacations or a preference for Baileys, the Irish cream liquor, in a sachet rather than in a bottle. Businesses that are able to satisfy the changing demands of consumers tend to profit during recessions.
From General Motors in 1908 to Fedex in the 1970s, there are quite a number of global examples of companies that rose in the midst of economic recessions.
Zoom, the video conferencing app, which allows remote work, is a more recent example of a company that has benefitted amid economic turmoil. The California-based company’s valuation has more than tripled this year alone as the world adjusts to the Covid-19 pandemic.
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In Nigeria, the 2016 recession also had some winners. For instance, AJEast Nigeria Limited, a beverage manufacturer and producer of now popular brands like Big Cola, Big Orange and Big Lemon, was able to steal a march on more dominant players at the peak of the recession.
Big Cola, which set up its factory in Nigeria in 2015, became the first drink to challenge the duopoly of beverage giants, Coca-Cola and Pepsi in decades. It did this with the help of Nigerian consumers who had been hammered by the recession and had lower purchasing power.
The company’s strategy was simple. In its own words, the strategy was to offer consumers “more value in terms of quality and volume for less money.”
So, when Coca-Cola increased the price of a bottle of the drink by 25 percent due to rising operation costs during the recession, AJEast exploited it by keeping prices low and even offering a bigger sized product in terms of quantity.
The strategy worked and even though there is no specific data showing by how much the market share of Big Cola has grown since then, its popularity is an indication of its acceptance in Nigeria. The company even went on to attract an investment of $50 million from Duet, a UK-based private equity company in 2018.
Local palm oil makers, Okomu and Presco, also benefitted from a sharp devaluation of the naira that forced businesses to shelve imports of palm oil and look inwards. The profits of both companies doubled under a year as demand for their product surged. The specific example of the palm oil makers is an indication of the opportunities in backward integration in Nigeria.
Indeed, there are opportunities yet again in Nigeria, which slipped into its worst economic recession in three decades in the third quarter of 2020, following two successive quarters of contraction.
These opportunities lie in creating products that can address low-income Nigerians who have been hammered by the recession and making lifestyle changes to cheaper alternatives amid the squeeze.
Some companies are already responding with the proliferation of sachet or single-serve products. These products provide a cheaper alternative for Nigerians faced with shrinking incomes and deepening poverty levels.
Manufacturers deploying the tack are able to target the poor but larger segment of the market.
Recessions also create opportunities to buy undervalued companies in the stock market. In 2016, First Bank, a leading Nigerian bank, share was priced at N3 as investors took a dim view of the lender’s piling non-performing loans in the thick of the recession. Savvy investors who overlooked the economic recession to bet on First Bank were rewarded two years later when the stock hit a high of N13 per share.
The opportunities in Nigeria are however set to be undermined by a slow pace of reforms targeted at easing business activity.
The snail-pace of reforms in Nigeria to create an enabling environment for businesses means many of these opportunities are passed up.
There is an infrastructure problem, which means businesses cannot rely on the national grid for constant electricity and must spend heavily on independent power generation while bad government policies like the controversial border closure add to needless hurdles for businesses.
The lack of credible reforms and unpredictability in the foreign exchange market is also inhibiting foreign investments at such a critical time when the country needs it most.
Savvy foreign investors tend to buy the dip during recessions, which means they are keen to invest when asset prices are low.
On paper, a weaker exchange rate should be an incentive for a foreigner to buy Nigerian assets, but despite the 24 percent devaluation in the naira this year foreigners are not rushing to Nigeria. On one hand, it is a sign that the currency is still over-valued but on the other it reflects the tough operating environment in Nigeria, one foreign investor said at a recent meeting.
“There are opportunities to acquire some companies that are cheaply valued in Nigeria but the foreign exchange regime makes it difficult to properly estimate your risk and return,” the investor, who did not want to be quoted, said.
