May 15, (THEWILL) – The performance of Nigeria’s major Fast-Moving Consumer Goods (FMCG) firms was severely impacted by a tough operating environment in the first quarter of the year (Q1 2022). Spiral inflation, decline in consumer demand, wrong-headed policies, among the others, combined to create a regime of high operating costs for the companies surveyed by THEWILL.
An analysis of the Q1 2022 interim reports revealed that the companies struggled to lift margins. Their profit and revenue haul showed an average 50 percent growth year-on-year, while the key six cost/expenses indices revealed an average 92 percent increase. The selected key cost areas include Tax Expenses, Cost of Sales, Administrative Cost, Sales/Marketing Distribution, Raw Materials/Inventory and Employee Expenses/Entitlements.
Data from the firms’ interim reports posted on their websites showed a significant increase in their operating costs which could lead to downscaling in the firms’ operations, or outright downsizing to remain in business. Stakeholders and industry experts believe that the firms must take drastic measures to avoid sinking in the miry clay of high operating expenses as inflation rages.
The six quoted major FMCG firms surveyed include Nigerian Breweries Plc, Unilever Nigeria Plc, Nestle Nigeria Plc, Guinness Nigeria Plc, Cadbury Nigeria Plc and Dangote Sugar Refinery Plc. They have a combined market capitalisation of N2.3 trillion and constitute over 60 percent of total market capitalisation of the Consumer Goods Sector amounting to N3.36 trillion as of Friday May 13, 2022.
The combined revenue of the six firms for Q1 2022 was N462.2 billion as against N328.4 billion reflecting a 40.8 percent increase, while profit after tax (PAT) rose by 60.5 percent to N50.3 billion year-on-year against N31.4 billion in the corresponding period. On the average, the two income-yielding windows, combined, grew by 50 percent in the first quarter of 2022.
Nigerian Breweries, Nestle and Dangote Sugar recorded the highest revenue haul of N137.8 billion, N110.3 billion and N94.5 billion respectively during the period; while Nestle, Nigerian Breweries and Dangote Sugar posted the highest PAT of N17.9 billion, N13.7 billion and N8.9 billion respectively.
The highest expenses window recorded by the six surveyed firms was in cost of sales (COS) which jumped from N216.3 billion in Q1 2021 to N269.9 billion in Q1 2022, representing a 24.8 percent increase. The COS is the accumulated total of all costs used to create a product or service which has been sold. It represents the direct costs related to the manufacturing of goods and services that are sold. Nigerian Breweries, Dangote Sugar and Nestle posted the highest COS of N75.4 billion, N75 billion and N67 billion, respectively.
The companies’ raw/packaging materials inventories showed a total of N161.4 billion during the three months of the year, a 20 percent rise from N134.7 billion spent in the corresponding period in 2021. Nigerian Breweries report showed N54.7 billion worth of raw/packaging materials inventory during the period. Others are Dangote Sugar and Nestle with N48.2 billion and N32.3 billion respectively.
Employee expenses/entitlements during the period grew by 23 percent to N63.6 billion from N51.8 billion posted in Q1 2021, with Unilever recording the highest employee/personnel expenses/entitlements of N37.9 billion followed by Nigerian Breweries with N13.6 billion. The other higher number was that of Nestle which recorded N8.4 billion.
Sales/Marketing/Distribution expenses by the six firms totaled N57.9 billion against N40.5 billion in the corresponding period which reflects a 43.3 percent increase. Nigerian Breweries recorded N32.2 billion, followed by Nestle and Guinness with N14.3 billion and 8.3 billion respectively.
Tax expenses by the surveyed firms rose by 66.5 percent to N26 billion from N15.6 billion in Q1 2022 with Nestle, Nigerian Breweries and Dangote Sugar posting the highest: N9.9 billion, N7.2 billion and N4.8 billion respectively. Two companies recorded net losses on foreign exchange transactions: Nigerian Breweries N1.9 billion and Guinness N286 million.
With their profit/revenue windows showing an average 50 percent growth year-on-year, against an average 92 percent increase in the sampled six key cost/expenses indices, experts express concern over the ability of the sector to cope with the impending headwind. The immediate past director-general of Lagos Chamber of Commerce and Industry (LCCI) Dr Muda Yusuf expressed concern that some firms may shut down if their customers can no longer afford to buy their products.
“It calls for a lot of creativity and innovation on the part of the firms so that they can continue in business”, Yusuf said, explaining that the trend could create four scenarios.
He posited that the firms may find a means of breaking their products into smaller units that the consumer can buy or scale down their operations by reducing the size of their workers or reducing their working hours. Also, they may pass the extra cost to their consumers by increasing the price of their products.
“In a worst case scenario, the firms may shut down because it is better to be on zero than to be running negative”, Dr Yusuf, who is now the CEO, Centre for the Promotion of Private Enterprise (CPPE) told THEWILL by telephone.
The high operating cost will reverse the gains of recovery by the FMCG firms after the double tragedy of the 2020 COVID-19-induced recession and the 15-months land border closure which offered a ray of hope for the small firms engaged in the backward integration policy. Backward integration is a practice where companies are encouraged to cultivate their own raw materials by purchasing their suppliers or establishing farms to grow produce for their factories.
Operators in the SME space belonging to various sectors, especially agriculture and transportation, have benefited from the policy as the FMCG firms take giant strides in supporting and implementing the policy. The fortune decline for the sub-sector will severely impact on the margins of the small businesses playing at various points of the value chain.
For instance, Nestlé Nigeria planned to engage 5,000 smallholder farmers for the supply of raw materials for its agro-business operations. The initiative, ‘Developing Inclusive Grain Value Chains Project’, is in partnership with IDH— a Sustainable Trade Initiative and TechoServe outfit.
Nestle revealed that the objectives of the project include: working with six small and medium-sized enterprises (SMEs) that aggregate crops and supply them to Nestlé factories; aggregators and sub-aggregators will receive training on proper grain handling, storage, and testing, as well as entrepreneurial and financial skills; while logistics partners will receive training on proper handling and storage of grain during transit.
Nigerian Breweries stepped up local production of sorghum and cassava to boost local raw material supply for its plants. The FMCG firm has made significant strides towards the development and commercial cultivation of sorghum and its use by the industry since the 80’s.
FrieslandCampina WAMCO Nigeria has developed its local raw milk sourcing in a bid to support backward integration, an initiative that has provided a source of sustained income to almost 2,000 farmers (including 900 women).
Manufacturers in the flour milling sector have been taking steps to increase their tempo of backward integration in recent times. Flour Mills of Nigeria Plc has invested in Thai Farms and other agricultural projects to cultivate raw materials for most of its processes. Cadbury Nigeria established a cocoa processing plant in Ondo.
The challenged performance of the FMCGs firms emanates from the rising cost of goods and services which is eating into companies’ profits at levels not seen since 2017. This is despite price adjustments made across board by most of the consumer goods companies.
Latest report from the National Bureau of Statistics (NBS) states Nigeria’s inflation rate at 15.92 percent up from 15.7 percent reported in February. The rise in operating cost of many companies revealed dips in gross margins negatively impacting profitability growth.
Specifically, Nigerian companies spent a huge sum on power in the first quarter of 2022 as the cost of energy surged significantly across most countries in the world. Escalating power supply blackouts worsen the situation by forcing businesses and households to buy more diesel and petrol to operate generators. Cost of diesel sold as high as N850 per litre in some areas of the country, while some firms had to cut down on working hours in order to manage costs.
The spiral effects also extended to the cost of transportation on the back of petrol scarcity which lingered for six weeks in a row, caused by the importation of adulterated fuel. Notably, the high cost of operating expenses is rampaging the entire economic landscape hitting hard on the small and medium enterprises (SMEs) which are direct beneficiaries of the recovery phase of the FMCGs after the COVID-19 pandemic. Whilst price increases have helped cushion rising cost for some of the companies, experts anticipate a further dip in profits in the short to medium term if the current inflationary trends persist.
Last month, the Manufacturers Association of Nigeria (MAN) warned that the high costs of diesel used by their members could lead to a high cost of goods and services due to escalating cost of production.
“Knowing that diesel has been deregulated removes the question of a buffer to the cost. The law of demand and supply is at play here and since we have historically lacked local refining capability, we are left at the mercy of the vagaries of international price and the geopolitics of it. As long as the price of crude oil continues to go up, price of AGO will equally skyrocket,” Director-General, Manufacturers Association of Nigeria (MAN) Mr. Segun Ajayi-Kadir said.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
