Recession Series

FMCG firms seek raw materials locally as spiralling costs dampen margins


February 12, 2017 | 7:30 pm
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Fast Moving Consumable Goods (FMCGs) firms are intensifying efforts on local sourcing of raw materials as dollar scarcity and weak naira, among others, spiralled production costs hence undermining profit margins.
“Nestlé by our estimates procures c.70 percent of its raw materials locally and this will likely increase in coming years,” analysts at CSL Limited said in a note to BusinessDay.
“Among other reasons, we understand that the company has entered an off-take agreement with a cassava starch-processing firm, which is planning to begin production in 2018.PZ Cussons Nigeria Plc has stated repeatedly that it is working on a backward integration programme aimed at 100% local production of raw materials for manufacturing,” the analysts said.
Flour Mills plans to mitigate the effects of a shortage of dollars that hindered the importation of about 1.70 million tons of wheat a year by starting a sorghum plant that will mill 75,000 tons of sorghum by next year.
The latest earnings releases of some major players in the industry showed that input costs that cannot be passed on to consumers are increasing, raising concerns that most firms could record losses and hence having a negative impact on shareholders wealth.
In the period under review, the cumulative cost of sales of five firms that have released their results jumped by 36.88 percent to N509 billion, from N371.21 billion the following year.
Seven Up Bottling Nigeria plc recorded a back-to-back loss of N4.84 billion, as the beverage producer continues to grapple with the high cost of raw sugar, a raw material component in the manufacture of soft drink.
Analysts say this year will be horrendous for beverage producers because importers of raw sugar are starved of the necessary dollars to import the products.
“Beverage makers in Nigeria will remain in a difficult situation in 2017,” said Pabina Yinkere, head, research division, Vetiva Capital Management Limited.
“The major determinant still remains the direction of Nigeria’s FX policy. Sustained FX inaccessibility and possibility of further naira depreciation continues to create headwinds,” said Yinkere.
FMCG firms in Africa’s largest economy are the hardest hit from an economy reeling from a sharp drop in oil price, making the economy slipped into its first recession in 25 years.
Inflation for the month of November accelerated to 18.55 percent, the highest in 11 years, stoked by high price of foodstuff and gasoline.
The adoption of a flexible exchange rate last year saw the naira lose 40 percent of its value against the US currency.
While the Buhari’s administration has proposed a record budget that it said would pull the country out of a recession, consumers will face headwinds.
There are possibilities of a petrol price hike or devaluation of the naira and lower allocations of government revenue to states, which will result in delay in payment of salaries. 
Consumer wallets will be further dented as the price of a litre of fuel, especially kerosene, which is used by majority of Nigerians, has arisen to N500 from N250 previously held.
Johnson Chukwu, managing director and chief executive officer of Cowry Asset Management Limited sad that because the economic confidence is very low, it is difficult for people to continue to buy goods as they used to as inflation has eaten deep into their wallets.
In the light of the challenges bedeviling the industry, analysts at CSL have cut their price target for Nestlé to N709.9/s from 777.6/s previously; for Unilever to N24.2/s from N29.7/s previously, and PZ to N14.0/s from N26.9/s previously.
“We maintain our Hold recommendations on the stocks of Nestlé and PZ, but downgrade Unilever to a Sell, given the large downside potential (40%). We have adjusted our risk free rate and risk premium to 14% and 7% respectively, from 13% and 6% previously. These have contributed to our price target revisions,” said Analyst at CSL.
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February 12, 2017 | 7:30 pm
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