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Companies’ Future Earnings Could be up in Flames as Consumer Strength Fades

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The chief executives and shareholders of listed consumer goods firms who are excited over the stellar performance of corporates have been cautioned that the euphoria is temporary because rising inflation that is pushing consumers to cheaper brands and myriad of challenges means future earnings could go up in flames.

Anthony Uka, a 45 year trader who sells shoes on the street in Marina  Lagos, has significantly shrank the number of beers he drinks these days as he has switched from soap to a cheaper local brand to have his bath.

Disappointingly for consumer goods firms, Mr. Uka is not the only one as inflationary pressures, high fuel bills, and unemployment have squeezed the middle-class and tipped millions into poverty.

Analysts say it is only a matter of time before this demand side risk manifests in the books of companies whose revenue have been boosted by credit sales.

“I am afraid they may not be able to see good numbers going forward. A lot of them will see weaker demand as consumers are shifting from premium products to the value ones.  The most vulnerable are personal and home care product producers who have limited ability in raising prices because of the elasticity of demand for products as they are also susceptible to stiff competition from unlisted brands,” said Rasaq Abiola, analyst in an investment firm.

“People who can no longer afford lux soap will move to cheaper brands. It’s the reality,” said Abiola.

The International Monetary Fund (IMF) has said it expects Nigeria’s inflation figure to rise to between 18 and 22 per cent in 2022 following the rise in food and energy prices.

The jobless rate in Nigeria rose to 33.3 percent in the three months through December 2021, according to a report published by the National Bureau of Statistics. That’s up from 27.1% in the second quarter of 2020, the last period for which the agency released labor-force statistics.

Over 50 percent of the population of 200 million live on less than the World Bank’s $1.98 a day, as the misery index continues to deteriorate, making the country the poverty capital of the world.

Consumer goods firms are the best performers among sectors that have released half-year results, benefiting from a hike in key products to ward off the impact of rising input costs.

The largest and the most capitalised consumer stocks collectively grew revenue by 38.85 percent to N2.01 trillion in June 2022 from N1.45 billion the previous year, according to data gathered by MoneyCentral.

Their combined net income grew by 94.89 percent to N128.73 billion in June 2022, the largest expansion at the bottom line in 5 years.

However, analysts say most of the sales that have been seen are from inventories and raw materials of last year and that firms will begin to feel the pinch of volatile commodity prices and currency volatility this year.

The Russian and Ukraine war has ballooned the price of wheat, corn, barley, and other grains that are raw material components for manufacturers in Nigeria.

Also, the price of diesel oil which manufacturers rely on to power generator plants at the factory and offices has skyrocketed as the product is unregulated.

That is on top of the difficulty in sourcing for foreign and supply chain bottlenecks combined with decrepit infrastructure.

“Going forward, we expect the spike in global prices of wheat to continue to drive production costs of local industry players higher,” said analysts at Meristem Securities Limited.

“Thus, product prices are most likely to increase in the near term. However, considering the essential nature of these products, we maintain that demand will be sufficient to sustain revenue growth momentum. Increased production costs could however impact profitability margins for the companies,” said the analysts.

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