FX Stability to ease pressure on FMCGs’ cost margins

by | January 29, 2018 1:37 am

Fast Moving Consumer Goods Firms (FMCGs) in Africa’s most populous nation and largest oil producers are to spend less on input costs in producing each unit of product.

Analysts are betting that a foreign exchange stability and benign commodity price will help reduce cost of production of big consumer good firms operating in the country hence bolstering operating profit.

While inflation has fallen to an 11 month low to touch at 15.37 percent as at December 2017, it is still below the 6 percent and 9 percent Central Bank of Nigeria (CBN)’s target.

In the period of rising inflation, when firms are spending more to produce each unit of products, cost of sales ratio tends to be high.

The cumulative cost of sales ratio of 13 largest consumer goods firms that have released Third Quarter 2017 financial statement increased to 71.37 percent from 70.96 percent the previous year.

Also, combined cost of sales of the 13 firms surged by 29.72 percent to N923.56 billion in the period from N722.93 billion as at September 2016.

In 2013, before the share drop in oil price stoked a severe scarcity that hindered from firms from importing raw materials and equipment to meet production, the cumulative cost of sales of the thirteen largest consumer goods firms rose by 10.15 percent to N598.25 billion.

Dangote Sugar was able spent less on input to produce each unit of product as cost of sales ratio fell to 74.56 percent in the period under review as against 83.51 percent as at September 2016.

Nascon Allied Nigeria Plc’s cost of sales ratio fell to 63.1 percent in the period under review as against 66.67 percent the previous year.

The cost-to-revenue ratio measures operation efficiency by comparing operating costs as a proportion of the total revenue. In other words, dividing costs by the amount of revenue, the cost-to-revenue ratio shows the level of resources required to generate every dollar of revenue.

The introduction of a new foreign exchange window by the central bank in June 2016 last year eased the pains of fast moving consumer firms as they were able to source raw materials for production purposes.

Experts are of the view firms may see sales growth in 2018 as election induced spending are expected to bolster consumer wallets.

“FX availability and a stable input cost environment will ease pressure on the Cost-to-Sales margins, boosting operating profit,” said analysts at United Capital Limited. #

Johnson Chukwu, managing director and chief and CEO of Cowry Asset Management Limited argued that foreign exchange stability will lead to stability in cost of sales but it will not lead to cost reduction unless there is efficient in other input costs like electricity.

Manufacturers are struggling with huge energy costs as they spend money on diesel oil to power their generators at the factories.

Companies are intensifying strategies with a view to taking advantage of an expected rise in household income as the economy existed its first recession in 25 years.

The market is huge: Nigeria has about 190 million people, and that is expected to rise to 300 million by 2030 and 400 million by 2050, according to U.N. data, which would make it the world’s third most populous country after China and India.