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Fast Moving Consumer Goods (FMCG) firms operating in Africa’s largest consumer market are expected to resume long stalled expansion plans following today’s reopening of the interbank foreign exchange (FX) market.
With the adoption of a market driven FX policy, analysts say firms ranging from Nestle to Unilever, whose profit margins and inventory levels had nosedived owing to dollar shortages, will begin to see growth opportunities in the 180 million strong Nigerian consumer market.
“Each company will approach expansion plans on a case by case basis. If the revised business case still works, then yes they can expand, but many will rethink,” said Pabina Yinkere, Head of Research at Vetiva Capital Management, in an emailed note to BusinessDay.
“However, many top FMCGs had expanded recently, so they are armed with capacity to last a few years before the next expansion cycle.”
The resumption of interbank trading of FX and opening of a futures market may have also put the firms in better positions to plan ahead.
“Flexibility in Nigeria’s foreign-exchange market will bring clarity in terms of pricing and allow us to plan for the future,” said Larry Ettah, CEO of conglomerate UAC, in response to questions.
Nigerian stocks hit a three-week high in early session on Friday, as domestic investors took positions before today’s start of interbank currency trading under new rules introduced by the Central Bank, to attract foreign investors.
The main share index, driven by gains across banking and consumer goods stocks, climbed for the third straight day last week Friday, rising 1.68 percent by 1032 GMT to near the 29,000 psychological level.
Consumer goods brands, UAC and PZ Cussons had signalled lackluster performances in their subsequent financials, as the foreign exchange shortage continued to pose a significant threat to their profit margins.
Analysts say the domino effect of the CBN’s intervention through primary dealers, to inject foreign exchange to the inter-bank market will improve the bottom-lines of consumer goods firms, as well as help them revisit initial expansion plans they had earlier intended for this year.
“Recall Nestle had disclosed it had plans to expand and commence exportation of their food seasoning “Maggi cubes”, but had soft pedalled due to inability to source adequate raw materials for production,” an anonymous consumer analyst said in response to questions.
“The anticipated liquidity which the recently announced policy will bring, will aid them in importing raw materials and they just might revert to their exportation plans.”
A source close to the company told BusinessDay that Nestle Plc had started exporting its seasoning product “Maggi” to Britain and had plans to expand towards the United States.
However, Nestle’s inability to access the quantity of raw materials needed for production of the Maggi cube forced it to suspend its plans.
PZ Cussons, another victim, which generates a quarter of its profits in Nigeria, warned shareholders recently that it will take a one-off hit of £17 million (N6.88 billion) due to the foreign exchange shortage in the country.
The company also warned that it expected conditions to remain challenging in Nigeria, with a range of potential outcomes for the new financial year, dependent on the translational and transactional impacts of any movement in the naira exchange rate.
Analysts say resumption of FX trading may have cleared the uncertainty which had constituted a road block for dollar inflows to the country.
“There will be an immense level of confidence in the market. It will attract FPI inflow which has been on the side-lines amid an uncertain environment,” said Kyari Bukar, chairman of Nigeria Economic Summit Group (NESG).
A group of ten consumer goods analysts polled by BusinessDay could not agree more.
“The FX guideline release would dampen the tumult in the Fast Moving Consumer Goods (FMCG) sector, which saw inventory levels dip. It will have manufacturers breathe huge sighs of relief,” they unanimously said.
UAC’s Ettah had said the company was suffering from an increased “blended cost” from suppliers that use the black market to obtain dollars while the company struggles to get dollars on the interbank market; adding that it had been difficult for the company to “replenish inventory at cost-competitive rates” and to keep up with royalty remittances to overseas partners.
PZ Cussons said there were low levels of dollar liquidity in the country, and that its costs of operating in Nigeria had gone up, due to the additional cost of funding naira from the secondary market, in earlier reports.
The group said it was focusing on securing materials for its key products, while it was trying to keep pricing competitive in an economy that is suffering from soaring inflation.
Inflation spiked in May, as the Consumer Price Index printed at 15.6 percent for the month, the highest level in over six years, the National Bureau of Statistics (NBS) said in its most recent report.
BusinessDay findings show the spike was hinged on high energy costs and FX constraints.
LOLADE AKINMURELE
