• Wednesday, July 24, 2024
businessday logo


Second consecutive contraction in retail industry validates consumer goods firms’ woes

How recommendation engines work

The importance of retail sales cannot be overemphasised because it is pivotal to economic growth.

When people have money in their pockets to shop, manufacturers and retailers thrive as sales spikes, prompting them to expand operations and employ more staff.

The United States of America would have slipped into recession save for strong consumer spending, adding impetus to President Donald Trump’s campaign ahead of next year’s election.

Consumers spending also helped Germany avoid a recession in the third quarter as the largest economy in the Euro area economy continues to struggle with a weak export, especially in its automobile industry.

The reverse is the case in Nigeria, where the trade industry recorded its second consecutive contraction, thanks to constrained consumer wallets, tough operating environment, partial closure of the border, and lack of economic stimulus

The trade industry, which has slipped into a recession, contributes 15.20 percent to the GDP, but the country’s GDP expanded by 2.28 percent in the third quarter, from 2.12 percent in the 2.12 percent in the second quarter.

The more consumers refuse to open their purse string, the more it hurts earnings of Fast Moving Consumer Goods Firms (FMCGs) that are finding it difficult to cover their expenses due to weak sales.

The revenues of these firms no longer cover the cost, which means they are inefficient, as combined average net profit margin of the 10 largest firms fell to 2.25 percent in September 2019 from 6.31 percent the previous year.

A declining profit margin means that the firm is making less money per Naira of sales.

Perhaps more worrisome is that operators in the industry may not be able to transfer rising cost in the form of price increases to beleaguered consumers. They had hike the price of products in 2017 to fend off the effects of the rising cost of production brought on a severe dollar scarcity that hindered them from importing raw materials to meet production.

The chart showed margins were at an all-time high in 2017, a period that was concomitant with the introduction of a new foreign exchange regime by the central bank that helped ease the flow of foreign exchange.

“The new minimum wage would have spur consumer spending but only Lagos and Kaduna had agreed to pay,” said an analyst who prefers to remain anonymous.

“There woes will likely persist till next year as their cost may go up with the hike in taxes by government. “But the border closure could be positive for Nestle and Unilever because they produce stable foods. Dangote Sugar could also be a beneficiary of border closure as it had complained about smuggling across the borders,” said the analyst.

Analysts say it is difficult for companies to thrive in an environment where the vast majority live in abject poverty and that government have limited time to reflate the economy.

A gloomy report by the World Bank said Nigerians living in extreme poverty could increase by more than 30 million by 2030, pushing the country to account for 25 per cent of the world’s extremely poor population if government doesn’t quickly embark on needed reforms.

Today, an estimated 100 million Nigerian live on less than $1.90 per day. Close to 80 percent of households are in northern Nigeria, while unemployment creation and income gains have been concentrated in the central and South Nigeria.

Nigeria’s population growth is estimated at 2.60 percent, outpacing economic growth in a context of weak job creation, while per capita income is falling.

Experts say the country’s consumer landscape is set for multiple shifts and that manufacturers and retailers will have to adjust to the new dynamics.

By 2025, 55 percent of Nigerians will live in cities or towns, and the country will experience a 50 percent urban growth – the fastest urban growth, globally, according to a recent report by Nielsen, a global measurement and data analytics company.

“Everyone is fighting for growth and competition for consumers’ wallets has never been tougher. In a challenging environment, finding opportunities with the right insights becomes key to help beat the odds,” said Ged Nooy, managing director of Nielsen.