The amount Nigerian fast-moving consumer goods (FMCGs) companies are retaining from each naira of sales as gross profit fell to its lowest in over five years in the first half of 2020, as declining sales and higher costs bite hard on profitability amid the COVID-19 pandemic.
Analysis of the average gross margin for Nestle Nigeria, Cadbury and Unilever, three big FMCGs listed on the Nigerian Stock Exchange (NSE), shows only N29 gross profit was made from every N100 sale in the first six months of 2020, the worst record in over half-a-decade. Last year the industry average was N31.
The trend among the FMCGs reflects the impact of a struggling economy and its weak consumer spending, a situation worsened by the Covid-19 pandemic.
“There has been no significant improvement in sales on the back of soft consumer demand because of declining per capita income (PCI) among consumers,” notes Gbolahan Ologunro, a research analyst at Lagos-based CSL Stockbrokers.
Since Nigeria’s recession in 2016, the economy has expanded less than 2 percent on the average, below population growth of 2.6 percent. As many as four in 10 or 83 million Nigerians live on less than N376.5 per day or under $1 on 379/$, according to the latest poverty count by the National Bureau of Statistics (NBS).
This means average consumers in Nigeria have become poorer, causing weaker demand that is affecting companies that even have inelastic demand, analysts say.
Ologunro also recognises that this together with increasing competition has contributed pressure on sales volume for the firms.
Although revenue increased in some years for these companies, the average growth of revenue increase has been on a downward trend from 16.4 percent in the first half of 2016 to -9.7 percent in the first half of 2020.
Cost margin, a measure of cost pressure, has largely risen in the period too. From 64 percent of sales comprising direct cost in 2016, the portion of direct costs has risen to 71 percent of sales.
Ayorinde Akinloye, a consumer goods analyst at CSL Stockbrokers, comments that the naira devaluation, which has occurred about four times since 2016, has raised cost components of firms sourcing input from abroad.
However, “Many big and small local businesses that are not listed on the NSE have sprung up to heighten competition by having more local market reach and providing cheaper alternatives to Nigerian consumers,” Akinloye says.
This trend by unlisted domestic businesses will likely continue to make those FMCGs that are listed to experience declining market share, in light of prevalent economic situations, he notes.
United Capital analyst, Yinka Ademuwagun, identifies the inability of FMCGs to sufficiently increase their selling price to cover their rising costs.
Despite Nigeria being a big market of about 200 million people, it is also a poor market, causing consumers to be price-sensitive and gravitate towards lower-priced commodities.
Ademuwagun explains that naira devaluation has adversely affected importation costs, thus encouraging the smuggling of products from other countries at much cheaper prices. Such smuggling activities have greatly depleted the market share of FMCGs listed on the NSE and resulted in the border closure.
“To make matters worse, the Covid-19 pandemic has disrupted FMCGs from reaping benefits of the border closure, thereby contributing to worse unemployment levels and further weakening the purchasing power of consumers’ income over the years,” Ademuwagun says.
Although sales are declining, FMCGs have managed to grow net profit margin since 2017, but the coronavirus pandemic weighed on bottom line in the first six months this year.
