Firms’ distribution cost rises by 64% on petrol hike

As Nigeria continues diversifying its economy and fostering business growth, high distribution costs remain a persistent barrier for companies across various sectors, thereby impacting profit margins.

BusinessDay analysis of 19 firms across five sectors – cement, FMCGs, brewery, healthcare, and oil and gas- showed that distribution and selling costs increased to N920 billion in the nine months of 2024, up 64.1 percent from N560.5 billion in the same period in 2023.

The analysis revealed that cement makers led the sectors with the highest spend in their distribution expenses amounting to N574.1 billion from N334.3 billion, followed by brewers with N194.2 billion from N114.1 billion; FMCGs with N127.8 billion from N100.1 billion; oil and gas with N15.9 billion from N6.1 billion and Pharmaceuticals firms with N8.04 billion from N5.91 billion.

Some of items pushing the distribution costs for the companies include: marketing, administration, and selling expenses.

“Cement manufacturers in Nigeria face exceptionally high distribution costs due to a combination of logistical, infrastructural, and market-specific factors,” a Lagos-based analyst said.

He said “Nigeria’s road infrastructure challenges, including poor-quality roads and traffic congestion, drive up the wear and tear on vehicles, fuel consumption, and delivery times. For cement, timely delivery is critical, as delays can lead to product degradation or reduced usability.”

According to the analyst, cement is extremely heavy and bulky, requiring specialised, high-capacity trucks for transportation. This raises fuel, maintenance, and handling costs compared to lighter goods in FMCG or brewery sectors, which can be more economically distributed.

Femi Egbesola, national president of the Association of Small Business Owners of Nigeria, said those who rely heavily on distribution spend more compared to other sectors that consumers can easily buy directly from the manufacturers.

“For the consumer goods firms, it is easier to buy from the manufacturers, unlike the cement makers that have to deliver their goods directly to the consumers because of the distribution process involved.”

Nigeria’s distribution networks face infrastructure challenges that drive up operating costs. Many areas lack well-maintained roads, increasing travel times and vehicle wear and tear. “In some cases, what should be a two-hour drive can stretch to an entire day due to road conditions,” said Uzo Uchenna, a professor of marketing at Lagos Business School.

“The expenses are even higher for businesses aiming to serve the vast northern and eastern markets due to additional transit costs and delays. Moreover, Nigeria’s fragmented supply chain network compounds these costs,” he said.

Nigeria’s limited rail network further compounds this reliance on costly road transportation. Data from the National Bureau of Statistics indicates that transportation costs for intercity journeys surged by over 21 percent as of September 2024, largely due to fuel price hikes and a volatile exchange rate.

President Bola Tinubu’s administration, initially promising to reduce petrol costs, instead faced backlash following several fuel price hikes.

The removal of fuel subsidies and the devaluation of the naira have worsened the economic strain, raising petrol prices by 488 percent within the year and diminishing the naira’s value to over N1,600 to the dollar. September’s average petrol price reached N1,030 per liter, up from N626 in 2023.

Similarly, the economy has been facing rising inflation, according to NBS, the Consumer Price Index increased to 33.88 percent in October from 32.70 percent reported in September 2024.

According to analysts, this was driven by high petrol prices and reduced food supply resulting from logistics and transportation costs.

The Financial Derivatives Company (FDC) said in its recent economic bulletin that the impact of the naira in the forex market has been profound.

Analysts at CSL Stockbrokers said that the increase in inflation is as a result of increase in pump price and depreciation of the naira.

“For core inflation, it is expected that the lagged effect of the recent increases in petrol pump prices and the continued depreciation of the Naira in the period would exert upward pressure, contributing to a month-on-month increase,” it said.

This inflation has hit both businesses and consumers hard, with rising transport costs increasing market prices and squeezing household budgets. “The cost of distribution is hindering our competitiveness in the international trade market,” said textile exporter Oluwasegun Balogun. “By the time we factor in logistics, our pricing becomes less attractive.”