N818.3bn FMCG losses hint at economic freefall for Nigeria, says analyst

Business a.m.

Nigeria’s fast moving consumer goods (FMCG) sector’s weak performance in the first of  2024, resulting in massive losses, raises red flags for the country’s overall economy. Unless swift action is taken to address this issue, analysts at advisory services firm, Kreston Pedabo fear that a major downturn could be on the horizon.

Nigeria’s FMCG sector reported a pre-tax loss of N818.3 billion for the first half of 2024, a 233 percent increase from the previous year’s losses. This substantial setback has sparked concerns that the Nigerian economy may be on the verge of a significant downturn.

According to market data, Nestlé Nigeria, Dangote Sugar, and Guinness Nigeria are among the major players in Nigeria’s FMCG sector worst hit by the H1’ 24 losses, largely attributed to soaring operational costs, compounded by recent government policies like the deregulated petroleum industry and fluctuating foreign exchange rates. 

These challenges have severely squeezed profit margins, putting over 50,000 jobs at risk and adversely impacting millions of Nigerians who rely on the sector for their livelihoods.

Kehinde Folorunsho, a partner at Kreston Pedabo, expressed concern about the huge losses in Nigeria’s FMCG sector, highlighting the sector’s crucial role in the African economy. 

Folorunsho, in a note, stressed that the FMCG sector not only provides everyday essential goods like food, beverages, personal care, and household items, but it is also a key contributor to Nigeria’s overall economic health. 

According to him, any decline in this sector could have a ripple effect, significantly impacting not just individuals, but also the economy as a whole.

Folorunsho stressed the critical importance of prompt policy interventions and government support to prevent the FMCG sector’s growing losses from derailing Nigeria’s economy. 

He noted that while some companies within the sector are attempting to streamline costs to weather the storm, inflationary pressures and high operating costs persist.

Folorunsho, an expert accountant and tax practitioner with memberships in both the Institute of Chartered Accountants of Nigeria (ICAN) and the Chartered Institute of Taxation of Nigeria (CITN), ascribed the losses in Nigeria’s FMCG sector to the combination of recent government policies, which include the deregulation of the petroleum industry and foreign exchange rate harmonisation. These measures, while well-intentioned, have resulted in increased operating costs, ultimately eroding profitability within the sector.

“Recent government policies, including the full deregulation of the petroleum industry and harmonisation of foreign exchange rates, have significantly increased production costs and reduced profit margins for businesses in Nigeria, particularly in the FMCG sector. As a result, the half-year financial statements of major FMCG entities have reported a combined loss before tax of N818.3 billion, primarily due to these policies,” he stated.

Folorunsho cautioned that if the FMCG sector’s losses persist through the end of 2024, the fallout could be severe. The industry’s job losses, which he anticipates will exceed 50,000, would not only affect the individuals directly impacted but could also drive poverty levels up, given that 200 million Nigerians rely on the sector for their livelihoods. He noted further that reduced government revenue, in turn, could hamper essential services and infrastructure development, further exacerbating the country’s economic instability.

 While the challenges facing Nigeria’s FMCG sector are significant, Folorunsho maintains a cautious optimism for a recovery in the second half of 2024. The financial expert predicts that cost optimisation strategies, coupled with the start of operations at the Dangote refinery, could be key drivers of this potential rebound. However, to fully support the struggling sector, he urged the government to implement policies aimed at stabilising foreign exchange rates and reducing lending rates, ensuring a more conducive business environment for FMCG companies.

Despite glimpses of optimism, Folorunsho cautioned that deep-rooted challenges, such as exorbitant operating costs, volatile foreign exchange rates, and fierce competition, will continue to weigh on Nigeria’s FMCG sector. The recent 55-60 percent increase in PMS prices, he said, could further diminish consumer spending, reduce purchasing power, and subsequently depress demand for FMCG products. And, with diesel prices remaining high, profit margins will likely remain under immense strain.

To weather the brewing economic storm, Folorunsho suggested that FMCG companies could employ several strategies to stay afloat. These include embracing innovative pricing models, diversifying their product offerings, and investing in new distribution channels to ensure their products remain visible and competitive. Additionally, an uptick in collaborations and partnerships within the industry could provide a much-needed lifeline, allowing companies to pool resources, share expertise, and even mitigate risk, all in the name of navigating the choppy waters ahead.

The chartered accountant noted: “To address the challenges facing the FMCG sector in Nigeria, I would recommend a multi-faceted approach. Firstly, the government should implement policies to stabilise foreign exchange rates, such as introducing a foreign exchange stabilisation fund, to cushion the impact of currency fluctuations on import costs. “Secondly, measures should be taken to increase access to affordable credit for FMCG businesses, such as reducing lending rates, increasing loan tenors, and providing sector-specific lending programmes.

“Furthermore, investing in critical infrastructure, including roads, ports, and logistics facilities, would enhance the sector’s competitiveness and reduce costs. Tax incentives and subsidies could also be offered to encourage local manufacturing and reduce reliance on imports.”

According to Folorunsho, the path to long-term recovery for Nigeria’s FMCG sector requires addressing the underlying issue of regulatory inefficiency. He concluded that by streamlining regulatory processes and reducing bureaucratic hurdles, the business environment could be transformed into a more conducive space, facilitating efficient and effective operations for FMCG companies.