Report: FCMGs Adjusting to Economic Realities

Obinna Chima

Nigeria’s fast moving consumer goods (FCMG) sector is one of the hardest hit by the economic crisis in the country that has been raging since 2015, a report has stated.

The report by analysts at Lagos-based CSL Stockbrokers Limited, stated that at this stage, they see little reason for things to improve markedly in the sector in 2017, adding that inflationary pressures would continue to weigh heavily on consumer spending while higher input costs that cannot be passed on to consumers will tighten their squeeze on margins.

The report covered three FMCGs: Nestlé Nigeria, Unilever Nigeria and PZ Cussons Nigeria.
“Nevertheless, there appears to be at least one common bright spot for these companies: we believe improved trading conditions in the north of Nigeria supported sales in calendar year 2016 with all three companies taking back some of their 25-40 per cent in revenues lost to insurgency from 2012. That said, we only see little additional sales uplift in the years ahead.

“In our view, it will be crucial for these companies to decrease dollar exposure to mitigate foreign exchange risks. This will be no panacea however. Although recent times have seen them doubling down on import substitution, we believe an inflationary environment, under-capacity of Nigerian producers of raw materials, and unmet quality standards will continue to put upward pressure on production costs,” it added.

In addition, it noted that despite the essential nature of some FMCG brands, high levels of competition from established players and, increasingly from cheaper, unbranded substitutes, will limit firms’ abilities to pass on higher input costs to consumers, meaning that margins are likely to be squeezed further in the coming years.
The firm therefore revised its estimates for Unilever, Nestlé and PZ, adding that it anticipates that higher input costs would weigh on Nestlé’s and Unilever’s top line, while PZ’s top line will be weighed down by sluggish sales in its electronics businesses, in our view.

Since 2012, the Nigerian consumer has come under a lot of pressure. From fuel subsidy removals, to the naira’s free fall in recent years, various factors have contributed significantly to inflation. In addition, increases in electricity tariffs (in line with provisions of the multi-year tariff order (MYTO); increased import duties on staples like rice, wheat and sugar, and on used cars; and more recently, the restriction of foreign-used car imports through land borders (a cheaper means of car imports), have further dented consumer demand, in our view.
In response, the Nigerian consumer has been trading down the value chain, switching to cheaper alternatives as living costs rise and income levels generally remain low.

Furthermore, the report stated that although 2017 may be the year that sees the economy moving away from recession, the overall picture for consumer spending remains bearish and a potential turnaround is hard to see at this stage. It stated that it foresaw the consumer continuing to face headwinds, chiefly because of: the possibility of another round of petrol pump price hikes and/or naira devaluation; lower revenue allocations to state governments resulting from lower oil receipts caused by renewed militant attacks on oil pipelines, further hindering abilities to pay employee salaries; significant increases in the price of domestic cooking fuels, particularly kerosene (used by the vast majority of Nigerian households), which trades at a pump price of N500 per litre (from N250 per litre previously) as of the time of writing; prices of soft commodities, such as wheat and raw sugar, look set to rise in 2017 and soft commodity-dependent manufacturers will pass these on to their prices.

“We believe the commercial landscape in which Nigerian FMCG companies operate has changed in recent times and this may be affecting their performance in different ways. Prior to the slump in oil prices and the ensuing foreign exchange shortages, the FMCG space had a strong presence of imported brands.

“Recently though, these have been less visible on shelves and we believe importers’ weaker competitiveness resulting from higher exchange rate pass-through to prices is largely responsible for this.
“Regardless, competition remains fierce and looks set to intensify further, as indigenous FMCG companies are left to contend in an environment where the consumer is acutely price sensitive.

“As such, passing higher costs on to the consumer will come at the expense of sales volumes for products for which demand is elastic, and shifts to cheaper competitor brands for inelastic-demand products. Nevertheless, FMCG companies are addressing this by downsizing products rather than shifting prices,” it added.