Manufacturers profitability pressured as production cost intensifies

The pressure on the profitability and productivity of manufacturing firms in Nigeria particularly the Fast Moving Consumer Goods (FMCG) producers has intensified over the past few months due to the consistent rise in production and operating cost.

Despite emerging winners amid the pandemic as producers of essential goods, companies are showing signs of strain as macroeconomic and post-pandemic conditions hit.

BusinessDay analysis of Nestle Nigeria, Dangote sugar, Cadbury, Unilever, and NASCON which are listed on the Nigerian bourse reveal that the cumulative cost of sales of these consumer goods firm for the period ended June 2021 was N197 billion which was a 32 percent increase from the N149 billion in the same period of 2020.

This significantly affected their profit for the period as it grew by a marginal eight percent moving from N22.6 billion in 2020 to N24.5 billion in the first half of 2021. Their collective revenue was salvaged as it grew by 29 percent to N24.5 billion in 2021 from N22.6 billion in 2020.

The surge in cost of sales was primarily driven by shortage in foreign exchange (FX), raw material availability, rigorous port operations, and increase in energy cost.

Read Also: Manufactures suffer decline in sales despite increase in production costs

Jide Babatope, Lagos-based economic analyst said the direct and operating cost of these firms increased significantly eating deep into their revenue, which caused the slow growth in their profit margin.

“The FMCGs were confronted with high operating costs during this period following the persistent inflationary pressure and FX illiquidity. Companies with huge profit decline must have experienced a double whammy of fragile revenue growth and escalated cost level,” he explained.

FX availability and accessibility has remained challenging for manufacturers. Currently it cost N410 to get one dollar from the Central Bank of Nigeria (CBN), while it cost around N538 in the black market.

The unfavorable exchange rate has increased production cost significantly causing manufacturer’s operations to drag, this is because no less that 40 percent of raw materials, machines and other inputs required for production are sourced using FX

Although Nigeria operates multiple exchange rates for various transactions, manufacturers are still forced to rely on the parallel market to source FX which is more expensive than the official rate.

Furthermore, the COVID-19 pandemic emanated from China, the world’s manufacturing powerhouse and Nigeria’s largest trading partner especially for manufacturing inputs, this caused an abrupt stop in the supply of raw materials, goods, tools, and machinery for manufacturing companies.

Local sourcing of input, which should serve as an alternative, is also struggling due to rising insecurity in crucial regions. Manufacturers also say that locally sourced raw materials tend to have lesser quality.

In its Q4 2020 CEO Confidence Index (MCCI), MAN revealed that high cost of power due to increase in electricity tariff, and increase in the cost of self-generated electricity were major challenges encountered in the business environment which significantly reduced productivity and revenue.

Nigeria ranked 169 in the getting electricity metric, scoring 47.4 points on the World Bank’s ease of doing business 2020 report and a zero in the reliability of power supply.

Experts say that the high energy cost of these companies threatens the existence and continuity of the businesses as they are forced to produce at a higher cost.

“The implication of these challenges highlighted is that it impedes the growth and development of the manufacturing sector, thereby affecting the attainment of the sector’s full potential of massive job and wealth creation,” Mansur Ahmed, president of Manufacturers Association of Nigeria (MAN), told BusinessDay

He noted that when there is steady energy supply, operating costs of manufacturers fall, leading to the production of cheap but high quality products that can compete in the local and global market.

Local manufacturers have continuously cried out over the poor access roads to the Lagos ports plagued with gridlocks as well as the high cost of clearing cargoes at Nigerian seaports which causes delays of raw materials to factories and exports to destination countries.

In addition to this, manufacturers are operating in an environment plagued with double digit inflation, high unemployment and other unfavorable macroeconomic conditions which constrains consumer spending thus affecting the income and margin performance of the producers.

Unfortunately, manufacturers may not have their silver lining soon as pressures do not show signs of subsiding. According to analysts at United Capital, raw material cost will remain elevated as insecurity rises, while international sourcing remains a challenge due to FX shortage and continued naira devaluation.