As corporate start to release their release quarter results on the bourse, investors should be wary of a sector: The consumer goods industry.
The outlook for the industry is bleak, though it is the hardest from a stuttering economy, while consumer disposable income continues to dwindle. Also, high poverty rate, decrepit infrastructure, hefty levies, high inflation, and border closure makes the case less compelling.
With unemployment rate is as an all-time high of 23 percent and over 50 percent of a population of 200 million live on less than $1.98 a day, a recession is eminent.
Analysts said that third quarter results could be the worst in a decade, even more putrid than the recession period- when a precipitous drop in crude oil price stoked a severe dollar scarcity that paralyzed business activities.
The latest GDP report released by the National Bureau of Statistics (NBS) showed the manufacturing industry contracted by 0.13 percent in the second quarter from the 0.81 percent expansion in the first quarter of 2019.
However, the contraction contradicts evidence from manufacturing PMI data published by the Central Bank of Nigeria (CBN) in the period which suggested that activities continued to expand.
A the moment, consumer goods firms are finding it difficult to turn each Naira invested in sales into higher profit since it isn’t easy passing on cost to the already squeezed consumer.
The cumulative average net profit margin of the largest consumer goods firms dipped to 4.17 percent in June 2019 from 6.39 percent the previous year.
Also, their combined net profit fell by 47.18 percent to N47.18 billion in June 2019 from N64.24 billion the previous year, Dangote Flour and International Breweries recorded losses.
Sales volumes have been under pressure, and total cumulative sales of the 10 largest firms were flat at N738.51 billion in the period under review.
The outlook for the sector is not very positive, according to analysts at United Capital Asset Management Limited.
“Aside from the major challenges, the upside is expected to come from the implementation of the minimum wage,” said analysts st United Capital.
Analysts at United Capital however said that the gains from the minimum wage seem to be cap as the government is proposing reviewing upward the Value added Tax (VAT) that is expected to be passed onto consumers, in form of price increases.
This means consumer wallet will be further squeezed, as they have downgraded to cheaper price, while the unlisted that produce these products are cannibalizing on the sales of the listed brands.
Already, brewers are feeling pinch of hefty levies as government had increased excise duties on tobacco and alcoholic drinks, a double whammy for a sub sector reeling from stiff competition and deteriorating margins.
A dark cloud hovers over the industry as government intends to impose taxes on carbonated drinks, but economists say the policy is catastrophic and will lead to loss of jobs and hyperinflation as manufacturers of soft drinks will close shops due to low patronage.
The economy has been growing sluggishly since the country exited its first recession in 25 years as GDP expanded by 1.94 percent, lower than the 2.10 percent expansion in the first quarter of 2019.
Analysts have blamed the tepid growth on lack of policy making and governance on the part of the present administration.
Data from the NBS show that investment into the country dropped 53.5 percent in 2015 to $9.8 billion from $20.7 billion in 2014. At the thick of the recession in 2016, the figure reached its lowest levels at $5.1 billion not until the country exited recession in 2017, that investors started building up interest into investing in the country. In 2017, foreign investment picked up at $12 billion and went further to $17 billion in 2018.
FMCGs have cut back on the acquisition of property plant and equipment as economic activities don’t support expansion.
Capital expenditure spends by firms reduced by 20.97 percent to N54.91 billion in June 2019 from N69.50 billion the previous year.
“Despite improved foreign inflows over the last two months, we remain pessimistic on the sustainability of this trend as overall investor sentiment remains weighed down by underlying macroeconomic weakness and continued delay in the implementation of structural reforms to accelerate economic growth,” said analysts at Chapel Hill Denham Limited.
BALA AUGIE
