Foodie Naija Update

FOODIE NAIJA UPDATE (Nigeria’s Consumer Companies Crippled As Currency, Oil Woes Hits Profits)

The continued devaluation
Nigeria’s currency, the naira, as a result
of the decline in oil price combined with the crippling fuel
scarcity that pressured consumer wallets and huge energy costs have
dampened the profit of fast-moving
consumable goods in the Africa’s largest

This development is worrisome as most manufacturers have
resorted to mass downsizing in order to cut costs to boost the bottom line.

Already, Nestle, the Swiss food and Drinks Company and parent company of Nestle Nigeria, has cut 15 percent of its work force in 21
countries across Africa, claiming
it overestimated the continent’s rising middle class.

The devaluation of the naira affects manufacturers as they source most
of raw materials used for the purposes of production abroad,
hence causing imported inflation.

Nigeria’s Central Bank scrapped its bi-weekly currency auctions in February 2015 and said it would sell dollars only at the interbank
near N198, a move that amounts to a de facto devaluation of
Nigeria’s currency.

The naira has come under pressure since June 2014, and has lost about 4.5 percent of its value against
the dollar this year, because of declining crude prices, which fell more than 50 percent of its value
in 2014.

“We imagine that most of these firms will struggle to survive daunting
pressure on costs, occasioned by the naira volatility and the pass-through impact of naira
depreciation,” confirmed Saheed
Bashir, an analyst at Meristem Securities
“Brewers and flour millers in Africa’s largest economy import more than 50 percent of their raw
materials and other inputs.

Even other household and personal product
firms such as Nestle, PZ, Unilever and
Cadbury which had diversified and gone into sourcing local raw materials, are not exempted from
the impact of the falling naira,”
Bashir further said.

The rise in the cost of raw material occasioned by the fall in value of naira has also impacted on the
bottom lines of these firms.
The early earnings update of these FMCG firms (Nigeria Breweries Plc (NB), Guinness Nigeria Plc (GN) , Northern
Nigeria Flour Mills Plc (NNFM), Dangote Flour Mills Plc (DFM),
PZ Cussons Nigeria Plc, Cadbury Nigeria Plc, International
Breweries Nigeria Plc (IBN) and Unilever
Nigeria Plc) show sluggish growth in sales and profits.

Despite a single digit growth in sales, the cumulative half year net income of these 8 firms shrank by 89.09 percent to N2.56 billion from N22.56 billion the previous year.

DFM and Cadbury’s recurring loss position is responsible for the
sharp fall in industry profit.

Exchange rate volatility is indeed
debilitating the performance of
manufacturers, as further analyses show that the cost of
sales ratio, which measures the relationship
between sales and production costs
increased by 5.31 percent, leaving them with low average
profit margin of 1.37 percent.

Adding to the consumer goods
woes is the crippling fuel crisis that nearly grounded Nigeria
economy as consumer wallets
were pressured due to the doldrums.

Insurgency in the north part of the country which hindered firms form
pushing their goods to the crisis region and bad roads that spiral up distribution expenses are accentuating the tough operating environment firms operate in.

There will likely be loss of revenue amid higher operating
expenses and only very efficient companies will be able to protect profit
margins in the current business
environment,” said Tajudeen Ibrahim,
analyst with Chapel Hill Denham, in an email to BusinessDay.


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