Business a.m
A recent report by financial solutions firm Cardinal Stone suggests that multinational firms in the Fast Moving Consumer Goods (FMCG) subsector may be forced to exit Nigeria in 2024 if the country’s operating environment does not improve
In its report, “Strategic Resilience: Sailing Through Business Disruptions,” Cardinal Stone warned that high operating costs are likely to persist for companies in the Fast Moving Consumer Goods (FMCG) sector.
The report noted that the FMCG sector is particularly vulnerable to fluctuations in commodity prices, exchange rates, import and clearing duties, and freight costs. It explained that, while global commodity prices may moderate in the near term, the naira’s significant depreciation against the dollar is likely to offset any benefit from this trend. In June 2023, the naira was trading at N422.00/$, but by December 2023, it had weakened to N951.94/$. This depreciation is likely to lead to higher costs for companies importing raw materials and finished goods.
In June 2023, the Central Bank of Nigeria (CBN) decided to float the naira in an effort to address the country’s persistent forex scarcity and reduce the gap between the official and alternative exchange rates. The official rate had been artificially kept low by the CBN, while the alternative market rate had been significantly higher. Unfortunately,the gap between the two rates had caused widespread distortions in the economy and led to shortages of foreign currency.
The report also noted, “On other fronts, weaker currency could spike diesel costs, as was the case in H1’23, wherein average OPEX-to-sales expanded to 16.1% from 15.9% from H1’22.
The pressures from diesel cost became pronounced in H2’23, following a rally in the commodity price to an all-time high at N1,004.98 per litre. We expect the drag from higher energy costs to extend into 2024, barring a shock in naira appreciation.”
On a positive note, Cardinal Stone expects companies to continue finding innovative ways to improve their operational efficiency in 2024. The firm believes there is potential for more collaboration between FMCGs to achieve economies of scale, diversify their product portfolios, realise cost synergies, and innovate technologically. The report further notes that this would improve the financial power of the companies involved.
The report cautions that, if the challenges of operating in Nigeria are not effectively managed, some companies may choose to exit the market entirely or focus on high-cost segments only. This would be similar to the recent decisions made by multinationals such as Procter and Gamble, GSK, Pernord Ricord, and Unilever.
