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Nigerian listed fast-moving consumer goods (FMCG) companies could see a further decline in revenue and margin in the year 2020 on attempt to hike prices of their products, according to BusinessDay survey of four analysts on the outlook of consumer goods industry.
The year 2019 was horrendous for the consumer goods space as industry players faced myriads challenges from fragile economic growth to protectionist policies of government – border closure and foreign exchange restriction for food imports.
Given the increment in Value Added Tax to 7.5 percent effective January 2020, combined with continued closure of the land borders as well as possible hike in electricity tariff, consumer goods players should get ready for a tougher year.
“The expected increase is premised on the fact that these companies have been patient enough for the economy to recover,” said Ayorinde Akinloye, consumer analyst at Lagos-based CSL Stockbrokers, “However, this is not yielding desired results as margins are suffering.”
BusinessDay review of the earnings’ scorecards of 10 listed players between January and September 2019 was unimpressive, as only three – Nestle, Cadbury and UACN recorded an uptick of 11.2 percent, 276.9 percent and 30.2 percent in post-tax profit year-on-year.
The brewery sub-sector churned out the most disappointing numbers in the first nine months of 2019, as all players in this space recorded a drastic decline in their net income. Nigerian Breweries’ bottom-line fell by 17 percent; Guinness by 47 percent and International Breweries had the greatest decline of 130 percent.
Others player such as Flour Mills of Nigeria, Dangote Sugar, Unilever and PZ Cussons all saw their net income trend downwards in the review period.
“The expected decision is based on recent policy actions of government and also on the fact that they are not making money as before,” said Abiola Gbemisola, analyst at Lagos-based Chapel Hill Denham.
The Nigerian economy is yet to recover fully from a recent recession, as growth of the wider economy, which printed at 2.28 percent in the third quarter of 2019, underperforms population growth rate estimated at some 3 percent. This indicates that Nigerians are getting poorer even as GDP per capita or income per head, a perfect proxy for living standard, fell by 40 percent between 2014 and 2018, official data show.
According to the World Bank, Nigeria’s tepid growth is driven by weak consumer demand combined with low private investment and contracting net exports. The bank expects Nigeria to expand by 2.1 percent by 2020-end, implying that an average Nigerian may get poorer in the New Year.
“The decision to hike prices will put industry players in a tight corner, given the price-sensitive nature of Nigerian consumers,” said Damilola Adewale, a Lagos-based economist and independent consultant.
According to Adewale, if they attempt to raise the price, they should expect lower sales revenue as consumers will most likely switch to cheaper substitutes.
A research report by Lagos-based Coronation Merchant Bank published earlier in 2019, corroborated Adewale’s stance, that most Nigerian consumers are leaving premium brands for cheaper value brands.
Data from the National Bureau of Statistics on GDP by Income and Expenditure approach at 2010 purchaser’s values show that consumption expenditure of households has been declining at varying pace since it rose by 1.5 percent in 2015.
Ayodeji Ebo, managing director at Afrinvest Securities Limited, posited that the move could further exacerbate the earnings performance of industry players.
“It will further impact negatively on their earnings because the economy is not growing significantly. They will further experience low patronage, weaker sales and if this persists for long they will cut down their cost of production, which will lead them to the downside by cutting staff,” Ebo argued.
Almost all consumer goods companies traded cash for credit in 2019 to support weakening revenue. This became the new normal in the industry as players adopted lenient credit conditions to drive sales.
