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Consumer Goods Inventory Pile up Prompts Profit Warning

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Fast Moving Consumer Goods (FMCG) firms who stocked up raw material inventories aimed at hedging against foreign exchange scarcity are shooting themselves in the foot as such a strategy would put a strain on cash flow and force them to cut their profit outlook.

A trend analysis by MoneyCentral shows total inventories of raw materials in the balance sheet of the largest listed consumer goods firms was up 25.02 percent to N724.84 billion as at September 2022.

It appears firms had opted to sustain suppliers amid a tough and unpredictable macroeconomic environment as combined inventories spiked by 60.99 percent to N579.79 billion in 2021.

However, the stock of inventories were up 10.61 percent and 9.86 percent in 2020 and 2019 respectively.

Analysts are of the view that firms have become proactive and nimble in placing orders from abroad and overseas due to uncertainties surrounding the 2023 elections and lack of confidence in the central bank’s foreign exchange management.

There are worrying signs that a stock pile up amid rising inflation hat has significantly weakened consumer spending alongside spiraling utility bills is a recipe for a reduction in profitability, a double whammy for sector players who may not be able to pass on further higher input costs in the form of price increases to an already beleaguered consumers.

It’s a measure aimed at sustainability of operations, as they seek to avoid stock out situations that may arise from lack of access to foreign exchange ro import raw materials or production shutdowns that may arise from political unrest,” said Abiola Rasaq, former head of investor relations at United Bank for Africa.

The inability of policymakers to find a lasting solution to the foreign exchange crisis have forced many firms to scale back on expansion plans while some shrank the workforce to stay afloat.

Of course, 2022 was a year of severe turmoil for consumer goods firms as they were flayed by rising commodity prices, currency devaluation, and protracted securities challenges while the Russia invasion of Ukraine added another layer of concerns as the price of grains which are a major raw materials component for the manufacturing of goods skyrocketed.

The food and beverage sector GDP, a proxy for the consumer goods sector, contracted by 4.05 percent year on year in the third quarter of (Q3) 2022 (vs +6.07 percent YoY Q3:2021), representing its first contraction since the first quarter (Q1) 2021.

The annual inflation rate in Nigeria accelerated for the 10th straight month to 21.47 percent in November of 2022 from 21.09% in October and above market estimates of 21.15 percent.

Unsurprisingly, the consumer goods stocks were the second worst performer in the equity market as it closed the year with a negative year to date of 3.85 percent; and that underperformed the NGXASI index positive gains of 18 percent.

It appears 2023 is going to be tougher as sector players will continue to struggle with rising input costs as the war in East Europe and other myriad of challenges are expected to linger.

“On a balance of factors, we maintain a moderate posture in the consumer goods sector in 2023, driven by sustained domestic demand, implementation of expansion initiatives and growing demographics,” said analysts at Meristem Securities.

“However, with no end in sight to the Russia-Ukraine crisis, commodity prices are expected to maintain an upward trend mounting further on production costs. Furthermore, with the lingering economic uncertainties (fuel scarcity, rising inflation, foreign exchange scarcity), we expect production cost to remain elevated which would adversely impact earnings potentials,” said analysts at Meristem Securities.

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