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Consumer Firms Inventory Pile up Set to Pressure Margins

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While consumer goods firms are proactive in ramping up the purchase of raw materials in advance from suppliers to hedge against rising price of commodities, the decision has led to inventory pile up that would keep pressure on margins.

When a firm has inventory pile up, it incurs operating costs such as increased warehouse costs and there is also the risk of obsolescence for perishable goods. A lot of capital is tied down at a time that entities need money to fund projects.

Data gathered by MoneyCentral shows the largest consumer goods firms have a combined inventory level of N620.20 billion in their balance-sheet as at March 2022, which  is 26.55 percent higher than 2021’s N490.07 billion the previous year.

A breakdown of the numbers shows stock of inventories was up 20.45 percent N352.19 billion in 2020, a pandemic year when the lockdown imposed by the government to curb the spread of the coronavirus hindered firms from importing more raw materials to replenish the warehouse.

Analysts at Chapel Hill say some prepayments for raw materials relates to sorghum and they expect a further rise in price due to the insecurity in the North.

“For context, Sorghum prices have risen by 26% ytd and are expected to rise further due to the insecurity in the Northern part of the country,” said the analysts.

The price of grains and other commodities have been skyrocketing on the back of the war in East Europe that elicited the imposition of sanction by Europe and the United States on Russia for invading Ukraine.

Russia and Ukraine account for one fifth of the world’s barley exports. Maize is a common substitute for wheat and barley.

An analyst who spoke to MoneyCentral on the condition of anonymity said the inventory buildup is due to weak consumer demand and that inflationary pressures, utility bills, transport fares, and high unemployment have squeezed consumer wallets.

The profit of many quoted companies were bolstered by a hike in key products, but rising receivables and spiraling storage cost is a downside risk to earnings.

The headline inflation climbed further by 90bps to settle at 16.8 percent year on year (y/y) in Apr-22, from the previous print of 15.9 percent y/y in Mar-22, which is 12bps higher than our forecast of 16.7 percent, according to data from the National Bureau of Statistics (NBS).

Consumer goods firms are tapping the debt market to raise capital and finance the purchase of raw materials needed for production.

Guinness Nigeria raised N23 billion, of which N10 billion was utilised in financing raw purchases in advance, according to Data from Chapel Hill Denham.

The value of inventory in the company’s balance sheet stood at N32.59 billion as at March 2022, and that is 51.89 percent higher than 2021’s N21.46 billion.

Flour Mills of Nigeria, the largest miller by market capitalisation, saw value of inventory increase by 41.98 percent to N277.51 billion.

The negative prognosis for the consumer goods sector could trigger a sell 0ff by investors who have an apathy towards Nigerian companies as the central bank’s capital controls continue to undermine the foreign direct investment.

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