Restructuring, acquisition seen for Nigeria firms as Naira stings FMCGs

•  Cadbury, Guinness, Nestlé in N472bn naira woes

ONOME AMUGE

A recent report by capital market conglomerate Meristem has found that major consumer goods companies in Nigeria, notably Cadbury, Guinness Nigeria, and Nestlé, suffered a combined loss of N472.3 billion during the first nine months of 2023, attributed largely to the depreciation of the naira.

Meristem, in its consumer goods sector update titled “Shifting Landscape for Consumer Goods Players”, explained that the weakening of the naira was a significant contributing factor to the losses experienced by the three consumer goods companies. The naira, reported to be one of the three worst performing currencies in the world in 2023, was seen to have impacted companies that rely on imported goods. 

The report also emphasised the detrimental impact of high inflation rates on production costs for consumer goods manufacturers, particularly those in the food and beverage industry.

The weakened naira which tumbled to an all-time low of N1,099.05 per dollar in the official Investor and Exporter forex window as at December 2023 in what has been a turbulent couple of months for the national currency, has led to higher import bills for companies reliant on imported raw materials, resulting in increased production costs. Worse still, companies have been forced to either absorb these expenses or pass them on to consumers through elevated prices. This has led to decreased demand for some products and, in some cases, forced companies to temporarily suspend operations or reduce their workforce.

In a previous report, Meristem had revealed that major Nigerian companies collectively lost N960.18 billion in the second quarter of 2023 due to the central bank’s new forex policy. The report showed the severity of the impact of the devaluation of the Naira on businesses across various sectors, highlighting the impact on large firms such as Cadbury, Guinness Nigeria, and Nestle. The most recent report further reinforces the detrimental impact of the weakening of the naira on the profitability of businesses in Nigeria.

The report also highlighted the significant pressure exerted by high inflation rates on production costs for manufacturers of consumer goods, particularly those in the food and beverage sector. It showed that the high cost of raw materials such as grains, dairy, and meat has directly impacted production, leading companies to either absorb the expenses or pass them on to consumers through higher prices. This has had a ripple effect throughout the sector, leading to decreased demand for some products and increased pressure on companies to remain competitive.

The report described the Nigerian consumer goods sector as a crucial pillar of the nation’s economy, playing a key role in gauging consumer sentiment and economic stability. Beyond being a collection of companies involved in production and distribution, the sector reflects the collective consumption patterns, preferences, and lifestyles of Nigerians. This makes it a dynamic indicator of the state of the economy and a barometer of changes in the nation’s socioeconomic fabric, and is evidenced in the way that changes in consumption patterns and preferences are closely linked to changes in the economy and society as a whole.

“This multifaceted sector spans a wide spectrum of products, encompassing everything from the fundamental necessities of food and beverages to personal care items, electronics, and beyond. In essence, it encapsulates the ever-shifting dynamics of economic trends and consumer behaviour,” Meristem stated.

The report noted that the weakened naira has had a significant impact on the costs of production for many companies in the consumer goods sector, as they heavily rely on the importation of raw materials. The devaluation of the naira has translated into significantly higher import bills, which have in turn led to a substantial increase in production costs. This has put pressure on companies to either absorb the increased costs or pass them on to consumers, leading to higher prices and reduced purchasing power.

According to Meristem, the food and beverage industry in Nigeria has remained a key contributor to the manufacturing sector GDP, making up 49.01 percent of the sector’s GDP in Q3:2023.

While the sector has been known for its resilience, it has not been immune to the macroeconomic headwinds that have affected the nation. In fact, the report noted that the food and beverage sector has shown a declining trend since Q1:2022, when it recorded its highest growth rate of 9.81 percent.  As a result of the various factors at play, the growth of the food and beverage sector has dropped further to 0.92 percent year-on-year (YoY) in Q3:2023, compared to a 4.05 percent YoY decline in Q3:2022 and a 4.94 percent YoY growth in Q4:2022.

The report pointed out that companies like Nigerian Breweries Plc, Nestle Nigeria Plc, and Guinness Nigeria Plc, who hold foreign-currency-denominated debts, have been particularly affected by the weakened naira. These companies have seen their debt burdens increase, as well as higher costs for letters of credit and other financing instruments.

Meristem also noted that the increased cost burden has had a significant negative impact on the profitability of many industry players. This has led to a number of companies reporting after-tax losses for the second and third quarters of 2023. 

The report went on to highlight the broader macroeconomic landscape of Nigeria, noting that the consumer goods sector has faced numerous challenges. These challenges include the ongoing foreign exchange shortages, the devaluation of the naira, lower purchasing power of consumers due to inflationary pressures, rising commodity prices, and other factors.

“As of 9M:2023, foreign exchange losses for major players in the industry stood at NGN472.35bn, further underscoring the magnitude of the challenge posed by the naira’s depreciation on the financial health of consumer goods companies,” the report stated.

Meristem analysts explained that the situation has had a significant impact on consumer behaviour, purchasing power, and spending patterns, all of which have been affected by the increased cost of goods. The report added that these changes have had an indelible mark on the overall dynamics of the consumer goods industry, leading to changes in the way businesses operate and consumers make purchasing decisions.

While there have been some positive signs, such as anticipated price hikes and robust sales during the festive season, the report stated that several concerns cast shadows over this outlook. These concerns include the ongoing inflation surge, the continued depreciation of the naira, and challenges in foreign exchange liquidity. These factors are expected to continue to weigh on the profitability of companies in the consumer goods industry, as they have done throughout the past year.

Looking ahead to 2024, the report predicts that more companies in the consumer goods industry will undergo business restructuring, strategic acquisitions, and expansions in order to sustain profitability and navigate the difficult operating conditions in the Nigerian market. These changes are likely to be driven by the need to remain competitive and ensure long-term viability. The report also noted that companies will need to focus on efficiency, cost control, and innovation in order to succeed in the challenging economic environment. This includes developing new products and services, improving marketing strategies, and implementing cost-saving measures.

Despite the ongoing challenges, the report noted that consumer goods companies are adapting their product categories to remain relevant and innovative, aiming to stay ahead of the curve and serve evolving consumer needs. This includes identifying and capitalising on new market trends, such as the increasing demand for healthier and more sustainable products. Additionally, companies are seeking to diversify their product portfolios and expand into new markets, both domestically and internationally. This is likely to create new opportunities for growth and profitability.

The report also stated that companies are expected to continue to prioritise investments in research and development, as well as in marketing and branding, to ensure their products remain competitive.

“The recent departure of consumer goods companies from the local market due to challenges holds significant implications for consumers and other industry players. We anticipate price hikes in consumer products due to decreased supply, leaving consumers with limited access to alternative products,” it stated. 

According to the report, there is a chance that some market players may take advantage of the situation by raising their product prices. This could lead to a price war, with companies trying to gain market share by offering lower prices. On the other hand, it said this presents an opportunity for the remaining market players, especially those in the homecare and skin cleansing market to increase their prices to increase market share by expanding their product portfolio and improving profitability.

Meristem stressed that without lasting government interventions to address the operational challenges faced by consumer goods manufacturers, it is likely that more companies will scale down or even exit the Nigerian market.