FMCG Firm’s Woes mount as Fuel Scarcity slows Consumer Spending

The nearly four-week long fuel scarcity, along with hikes in prices of goods may have dampened consumer spending and exacerbated the already weak position of Fast Moving Consumable Goods (FMCG) companies operating in Nigeria, Business Day investigations have shown.

Consequently, analysts say the second quarter earnings update of consumer firms will be worse than the performance recorded in the first quarter of the year.

The analysts argue that the near recession that hit the country has impacted on the purchasing power of consumers who have been spending threefold of their incomes on transportation.

The implication, according to them is that the firms would witness higher inventory, as consumers tend to re-order their priorities. This they further argue, emphasises the need for diversification by these companies for improved earnings.

Also, the devaluation of the naira, as a result of the decline in oil price and inflation which eroded consumer spending, had crimped the growth of FMCG firms in the first quarter of the year.

“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 a May 27 email to BusinessDay.

“We favour well-diversified FMCG companies such as UAC of Nigeria Plc in this regard, as solely food/drinks producers such as Nestlé Nigeria Plc, Nigerian Breweries Plc, and Guinness Nigeria Plc will likely see lower profit margins,” Ibrahim said.

The devaluation of  the naira as a result of the decline in oil price and inflation which eroded consumer spending had crimped the growth of FMCG firms in the first quarter of the year.

The cumulative net income of Guinness Nigeria Plc (GN), Nigerian Breweries (NB) Plc, Cadbury Nigeria Plc, Nestle Nigeria Plc, Dangote Sugar Refinery Plc, Unilever Nigeria Plc, PZ Cussons Nigeria Plc and Dangote Flour Mills Plc, fell by 61.01 percent to N16.94 billion in first quarter 2015, from N27.44 billion the previous year.

“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,” said Saheed Bashir, an analyst at Meristem Securities Ltd, in a response to questions.

The Central Bank of Nigeria (CBN) 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 lost more than 13 percent of its value against the dollar in the past six months and was trading 0.2 percent stronger at 199 a dollar  on Friday in Lagos.

Inflation increased to 8.7 percent in April, close to the top of the bank’s 6 percent to 9 percent target band.

“Some economists have put a figure to it, that as a country, within the past few weeks we may have lost as much a $1 billion in terms of what would have been spent but they couldn’t, because transportation costs were a lot higher. Everything went up five times the price,” said Dolapo Oni, Head Ecobank Energy Research.

The cumulative sales of the eight firms increased by a mere 1 percent as insecurity in the north prevented some firms from pushing products to the crisis ridden region.

Analysts are bullish on the future of Nigeria’s consumable goods sector, despite the temporary setback, given the country’s huge population, and rising middle class that craves for consumption.

According to a recent report from  McKinsey Global Institute (MGI), it is projected that Nigeria’s consumption could more than triple, rising from $388 billion/year to $1.4 trillion/year in 2030, an annual increase of about eight percent.

Stocks of some of the firms are selling off for now unwilling to look too far into the future.

Nestle’s one year return on the NSE dropped -16.08 percent, while Cadbury, Guinness and Nigeria Breweries dipped -46.02 percent, -11.48 percent and -9.33 percent respectively.

“Nonetheless, we have a positive long term outlook for the FMCG sector on supportive demography and likely increase of consumers’ disposable income,” said Ibrahim.

BALA AUGIE