Consumer firms’ rising raw material costs make case for local sourcing

Nigerian consumer goods firms are in dire need of a turnaround in sourcing raw materials as costs of items needed for production drive up input costs to new records, BusinessDay analysis shows.

The need for locally sourced materials has become even more important as firms continue to be exposed to foreign exchange volatility, leaving manufacturers with no choice but to up prices.

The analysis of five consumer goods firms that recorded raw materials costs in their financial books revealed a cumulative 99 percent year-on-year growth in 2024.

“The consumer goods firms should focus on local sourcing of made-in-Nigeria raw products which will be cheaper than importing. They should also cut other wastages such as carrying alot of inventory, they can opt for downsizing if need be,” Uzo Uchenna, a professor of marketing at Lagos Business School said.

He urged consumer goods firms to employ cost management initiatives which have to be holistic for them to affect their business environment.

“The consumer goods firms may have to remove some products from their portfolio and postpone some expansion plans to accommodate the current situation,” Uzo said.

“Technology is very important to get the supply chain right and to make supply chain work in Nigeria there is a need for technology to drive optimisation. Partnership can also help in terms of aggregation if different players come together to aggregate their supply chain infrastructure then it will make it cheaper to run.”

The identification of how much raw materials contribute to the total cost of goods sold helps businesses identify areas for cost reduction and efficiency improvement as a high raw material percentage can indicate higher production costs or a need to optimise the supply chain.

The five consumer goods firms analysed saw their cumulative raw materials cost amount to N1.88 trillion in 2024 from N945.9 billion in 2023.

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BUA Foods recorded the highest raw materials cost as a percentage of the total cost of sales with 92.9 percent, Nascon Allied Industries and Dangote Sugar Refinery recorded 86.1 percent, Champion Breweries recorded 57.9 percent and Nestle Nigeria recorded 54.8 percent.

Since 2020, Nigerians have been battling with persistent increases in prices of goods and services, aggravated by insecurity, Naira depreciation, and supply chain disruption caused by the COVID-19 pandemic.

A breakneck rise in the price of raw materials and shortages of key components are creating a logistical nightmare for consumer goods firms whose earnings have been depressed in the face of macroeconomic headwinds.

Some consumer goods firms source their raw materials locally while some import their raw materials. However, the majority import their raw materials and are faced with the nightmare of Naira devaluation.

Bel Papyrus Limited, one of Nigeria’s biggest tissue manufacturing outfits, told BusinessDay that due to the devaluation of the local currency, importing raw materials is expensive.

“Local manufacturers require government support to secure raw materials locally. Local raw materials, with a stable price, will allow companies to save costs, time, and key supply chain challenges,” Charbel Kairouz, the general manager of Bel Papyrus Limited told BusinessDay in a chat with journalists.

“In addition, if the government can look into making purchasing raw materials possible locally, it will go a long way to solving a key problem for all manufacturers in Nigeria,” Kairouz.

Manufacturers in Nigeria, apart from struggling to secure foreign exchange for the importation of raw materials, are battling high energy costs, which represent almost 40 percent of all their costs, according to the Manufacturers Association of Nigeria (MAN).

Sector players are vulnerable to fluctuation in commodities prices and exchange rate volatility as they import some of the raw material components needed in the manufacture of their products.

An example is Dangote Sugar which has a dependence on imported raw materials as over 90 percent of its raw sugar is imported, which is why the largest producer of the sweetener incurred N208.9 billion in foreign exchange losses that resulted in a loss after tax of N192.6 billion.

While Nestle Nigeria and Cadbury source 80 percent of their raw material locally, they both have seen higher input costs on the back of rising inflation.

A higher cost of production means profit margins for companies are squeezed.

The consumer goods sector has been beset by a mirage of challenges such as foreign exchange shortages and the Naira devaluation, lower purchasing power of consumers due to the unabated inflationary pressures, and the rising cost of commodities.

Other challenges include insecurity in the food-producing region, and poor infrastructure, as supply chain bottleneck exacerbated inflationary pressures.

The food and beverage subsector felt the most pang of rising inflation that drove up the cost of production.

Cardinalstone analysts already forecasted in their Consumer Goods Sector Outlook 2024 that consumer goods firms’ operating costs will remain elevated.

“Our coverage of FMCGs mostly relies on the importation of raw materials, with Nigeria a net consumer of most of the materials. Flourmill and Dangsugar import about 100 percent of wheat and sugar, respectively, while our other coverage names do an average of cumulative 50.0 percent.

“Thus, we re-emphasise that the sector remains heavily exposed to changes in
commodity prices, exchange rates, import and clearing duties, and freight costs,” analysts at Cardinalstone said.

The report stated that the average importation across these companies is about 50 percent. “Our other coverage names are also exploiting initiatives such as partial hedging and deliberate timing of raw material purchases to coincide with periods of harvest when prices are likely to be less under pressure.

“Sector players are vulnerable to fluctuation in commodities prices and exchange rate volatility as they import some of the raw material components needed in the manufacture of their products,” it said.

The consumer goods sector has been beset by a mirage of challenges such as foreign exchange shortages and the Naira devaluation, lower purchasing power of consumers due to the unabated inflationary pressures, and the rising cost of commodities.

The rate of inflation at the end of December 2024 stood at 34.80 per cent which exceeded the 21.40 percent that the Central Bank of Nigeria had set as a target for the year.

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Firm analysis

BUA Foods

BUA Foods’ raw materials cost increased to N914.8 billion in 2024 from N447.6 billion in 2023. The firm’s total cost of sales amounted to N984.9 billion from N468.9 billion.

Revenue summed up to N1.53 trillion from N729.4 billion during the period reviewed.

BUA Foods plc is a Nigerian company based in Lagos. It is part of the Nigerian BUA conglomerate. Its business activities include the production, processing and distribution of food products through its sugar, flour, pasta, rice, and edible oils divisions.

Dangote Sugar Refinery

Dangote Sugar Refinery’s raw materials cost increased to N546.1 billion in 2024 from N296 billion in 2023. The firm’s total cost of sales increased to N634.6 billion from N355.1 billion.

Revenue increased to N665.7 billion from N441.5 billion during the period reviewed.

Dangote Sugar Refinery Plc engages in refining and marketing sugar. The company imports raw sugar from Brazil, refines it into Vitamin A-fortified white sugar, and sells the finished product under the brand name ‘Dangote Sugar’ across Nigeria.

Nestle Nigeria

Nestle Nigeria’s raw materials cost grew to N357.5 billion in 2024 from N166.9 billion in 2023. The firm’s cost of sales increased to N652.5 billion from N329.9 billion.

Revenue grew to N958.8 billion from N547.1 billion during the period reviewed.

Nestle Nigeria Plc is a publicly listed food and beverage specialty company headquartered in Lagos. It’s mostly owned by a holding company based in Switzerland and have ties to the company Tolaram Group. The company was founded in 1961 and conducted trading under the name of Nestle Products Nigeria Limited.