In my series reviewing the manufacturing sector, clearly the cost of funding imported materials becomes an even greater problem during the kind of economic turmoil we are experiencing. Manufacturing is just one of the sectors hit by the depreciation of the naira.
A change from the N158 rate pertaining at the last RDAS before the crisis to the current N168 RDAS rate is tough enough but the CBN in its wisdom has taken the step of moving manufacturing raw materials into the ‘Finished Goods’ category, thus constraining industry inputs to the current interbank rate of N185 (all rates at time of writing). The original depreciation would be bad enough but this is a “double whammy”. I would like to know which sector ‘outranks’ food manufacturing as a critical economic lever on the economy and so, which sector therefore is still gaining advantage from getting the auction rate. Comments from this administration suggest that companies should just absorb the costs and should stop importing raw materials anyway. This view is simplistic and demonstrates that lack of understanding I have previously alluded to.
First, who would go to the cost and trouble of importing if local raw materials were available at the required quality and quantity? Raising letters of credit through a bureaucratic foreign exchange system, financing the working capital and cash flow, experiencing one of the most expensive and least efficient ports in the world and dealing with a plethora of agencies would not be the first choice of most manufacturers if they had the option of buying locally. What most observers fail to realise is that the biggest problem is not the cost of using local suppliers but their inability to meet two key criteria. The first is quality. The Nigerian FMCG market is highly competitive and consumers have a choice. Any producer that uses sub-standard inputs will deliver sub-standard products and will fail. Developing local suppliers to understand that consistent quality of raw materials is non-negotiable is a herculean task but slowly many are now making this transition and the future is brighter. Certainly, the current Agricultural Transformation Agenda is making a difference but it takes time. Secondly, there is the need for consistent quantity. Again, many local suppliers are finding it hard to guarantee to deliver the required volume consistently. No manufacturer can afford to lose sales or have idle machinery or workers as a result of lack of raw materials. Cost then comes third to these criteria. Every manufacturer I know will pay a price premium for good quality, consistently supplied local raw material, but to hear comments made by public officials, one would believe that it was a demonic plot by manufacturers to import from abroad. The correct policy with regard to local sourcing is to be consistent with the current ministry’s agenda but to understand this needs to be given time. In addition, a move from indigenous cropping to large scale commercial farming and processing will eventually be the only way to fully replace imported food and beverage inputs.
A quick look at the NSE with particular reference to food and beverage companies’ performance quickly tells a story. (A sector we have seen contributes 5 percent of GDP and employs some 80,000 people directly and many, many more through retail, supply and other partners.) For the last 3 or 4 quarters their published results have been worsening. Increased costs of distribution (especially to the North), loss of sales as distributors are afraid of holding too much stock in warehouses, empty markets (so often the focus of bombs) and a collapse of exports through Northern borders are all impacts of the security crisis. As the failure of economic ‘trickle down’ from GDP growth to the mass consumer market continues, so consumer confidence and spending stagnate. These factors have contributed to both stagnation in top-line growth and flat or worse bottom-line. If anyone thinks managing is easy, just look at the attrition rate of multinational FMCG CEOs. Without being comprehensive, it can be seen that Unilever, Cadbury, Friesland-Campina, Guinness, FAN Milk and Promasidor have all made changes in the last few months, some of which are certainly performance-related. Even Nestle and Nigerian Breweries, whose performances have been stellar for several years in succession, are having tough times.
Packaging companies and other suppliers are already increasing their prices to their customers. Consequently, any suggestions that FMCG companies will absorb cost escalations are more than hopeful. Many have already started passing on the rises onto consumers and this will escalate after Christmas. Inflation has been falling and is now down to around 7.9 percent but when a 20 percent increase in cost of imports is passed on, we will see a sharp uptick in the rate. For companies operating near “the bottom of the pyramid”, the N10 and N20 price points are critical. Any failure to maintain these will see many of the poorer consumers drop out of the formal economy with attendant social implications.
One would have thought government, including the Central Bank, would be engaging with manufacturers to see how best to manage a bad situation that we are all in. Unfortunately, the reverse seems to be true, as I shall discuss next week.
Keith Richards
