FMCG firms face troubled waters

by | February 13, 2017 1:51 am

Fast Moving Consumable Goods Firms (FMCGs) are facing rising inflation, a weak naira and rising input costs that cannot be passed onto consumer and will likely squeeze margins in 2017.
This is because early earnings results of 4 consumer goods Flour Mills Nigeria Plc, Seven up Bottling, Guinness Nigeria and International Breweries showed cost of sales increased by 43 percent, 52 percent, 55 percent and 45 percent respectively.
Combined cost of sales ratio increased to 83.26 percent in the period under review from 80.65 percent the previous year.
This means companies are spending more on input cost to produce each unit of product.
Expectedly, cumulative net profit of the these firms plummeted by 119.18 percent as rising input costs and a devaluation that spiralled finance costs overwhelmed the bottom line.
Seven up bottling, a company that has never recorded a loss in three decades felt the pinch as it posted a huge loss of N4.84 billion.
Ever rising price of raw sugar, a raw material component in the manufacture of soft drink is responsible for spiralling cost of production.
Analysts see consumer goods firms’ growth stunted on the back of continued consumer headwinds.
This is because there are indications that the pump price of fuel may increase and a devaluation of the currency is inevitable. Also, significant increases in the price of cooking fuel will undermine consumer spending. The price of cooking gas has risen to N4000 from N2500 previously sold.
Nigeria’s economy is in its worst recession in 25 years, stoked by a sharp drop in oil price and severe dollar shortages that
undermined growth.

Companies were unable to import raw materials to meet production purposes while they had to patronize the inaccessible black market for to meet dollar demands.
Inflation for the month of December accelerated to 18.55 percent, the highest in 11 years. The figure was bloated by high price of gasoline and food stuff.
Analysts at FBNQuest maintained their neutral ratings on Guinness Nigeria stock as the shares are moving into oversold territory.
The investment house retained their outperform rating on the shares of Flour Mills Nigeria. Nigeria’s largest miller recorded operating profit growth that was buoyed by sales.


FBNQuest upgraded their recommendation on the stock of international Breweries from Underperform to Neutral as the brewer continued to record strong sales.
In our view, it will be crucial for these companies to decrease dollar exposure to mitigate foreign exchange risks,” said analysts at CSL Limited.


“This will be no panacea however. Although recent times have seen them doubling down on import substitution, we believe an inflationary environment, under-capacity of Nigerian producers of raw materials, and unmet quality standards will continue to put upward pressure on production costs,” said analysts CSL


Analysts expect the implementation of the 2017 budget to spur consumer spending hence trickling down to the top lines of consumer goods firms.