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Wednesday, March 29, 2023

Consumer Firms are Star Performers Among Manufacturers

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Despite sailing in turbulent headwinds, Nigerian consumer goods firms have continued to show resilience, and like a cat with nine lives they spring back on their feet and come out stronger, which is why the sector is the best performer in the manufacturing industry.

For instance, the consumer goods firms collectively grew net income by 91.35 percent as of June 2021, according to data gathered by MoneyCentral.

And that compares combined profit growth of cement makers, (+2.82); and Paint Makers (71.95 percent).

The sector spans across an entire spectrum of value chain that involves manufacturing, distribution, wholesale, and retail with stiff competition among peers.

The second quarter GDP report shows the fast-moving consumer goods (FMCG) sector outperforming peers as it contributed 50.80 percent to the manufacturing sector output.

The consumer goods sector has been confronted with numerous headwinds this year but players in the sector have stayed true to their defensive nature , according to analysts at Meristem Securities.

For instance, some embarked on capacity expansion, while the likes of others adopted the backward integration strategy to lower input cost, digital distribution, and product innovation.

UACN deployed additional spring water capacity, while Flour Mills of Nigeria introduced its first Sunti Brown sugar, product repackaging, and a substantial increase in the product prices.

Additionally, other players like Dangote Sugar are increasing their adoption of backward integration strategies by expanding their capacity (from 3,800 Tons of Cane per Day to 6,000 Tons of Cane per Day) in processing sugarcane from newly developed farms.

Consumer goods sector being a subsector of the manufacturing industry is not shield from the tough and macroeconomic environment.

There has been a sharp rise in the cost of production due rising cost of energy   while inflationary pressure and spiraling utility bills have squeezed consumer purchasing power.

The foreign exchange crisis means higher raw material costs, and the Russia and Ukraine war has added another layer of corners as countries rely on both for grains.

Despite the stiff competition and price war, Nigerian Breweries, Guinness, International Breweries, and Champion Breweries, collectively grew revenue by 31.25 percent to N599.17 billion as of June 2021.

Flour Mills of Nigeria and Honeywell Flour Mills saw their combined net income spike by 42.25 percent to N380.27 billion, as players continue to struggle with rising raw material costs since they rely on China and Russia for wheat import.

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

“Thus, product prices are most likely to increase in the near term,” said the analysts.

BUA Foods and Dangote Sugar, the two largest producers of the sweetener in Nigeria, saw combined net income jump 35.21 percent to N43.08 billion as at June 2022, despite the higher price of sugar at the international market.

Analysts opine that the continuous investment by domestic players in the industry through backward integration programmes would help increase local production capacity.

Despite the fierce rivalry in the sector and product price increases, brewers are still recording substantial increase in domestic demand.

Analysts at United Capital are optimistic that there will increase consumer demand for FMCG related products on the back of election spending and festive periods.

However, in a pessimistic tone, they say rising energy costs still remain an elephant in the room.

“In the longer term also, we anticipate the continued flat growth in Real household income, growing by a CAGR of -1.1% in the last five years, will limit output for the sector as consumer price sensitivity towards FMCG output will begin to bite,’’ said analysts at United Capital.

“We believe exchange rate shortages will continue to be a significant headwind to expansion facing the manufacturing sector,” summed the analysts.

Nigeria’s plan to produce 1.8m metric tons of raw sugar and attain self-sufficiency by 2023 according to the 2012 Nigerian Sugar Master Plan, has not yielded the desired results.

Nestle, Nascon, and Cadbury, the three largest beverage producers, collectively grew net income by 39.53 percent to N31.62 billion as at June 2022 from N31.62 billion even amid the higher price of imported raw material such as Cocoa.

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