Consumer goods firms are walking a tight rope as a surge in raw material prices, freight costs, and foreign exchange depreciation have squeezed profit margin for a sector looking to recover from the coronavirus pandemic.
The supply chain disruption across the globe that magnified the costs of everything from aluminum to cotton and containers signal tighter times ahead for companies.
Also, inflationary pressures that spurs cost of sales has hindered them from delivering higher returns to shareholders of share appreciation; valuations are ridiculously high, and investor apathy towards shares have continued to be heightened.
Of course, firms had offset inflation with price increases, but they are still spending more to produce each unit of products. And perhaps more worrisome it is practically difficult to pass on higher input costs in the form of higher prices to consumers who are already reeling from utility bills and unemployment.
Dangote Sugar Plc, the largest producer of the sweetener in Africa’s largest economy, saw profit margin dipped to 7.94 percent in September 2021 from 18.55 percent the previous year. Net income dipped by 47.90 percent to N15.51 billion as at September 2021.
Nestle Nigeria’s net profit margin reduced to 12.83 percent in September 2021 from N15.02 percent the previous. However, a double growth in revenue led to a 5.13 percent increase in net income to N33.58 billion as at September 2021.
While Nigerian Breweries’ recorded double digit growth in sales, its net margins fell to 2.26 percent in the period under review from 2.29 percent the previous.
The brewer spent N0.92 on input cost to produce every Naira of product, which is why it has a very slim profit margin.
International Breweries benefited from a hike in key products that underpinned sales, but rising cost prevents top line impressive performance to translate into bottom line (profit) growth.
The brewer recorded a loss after tax of N13.52 billion as at September 2021, and its total production cost of N144.17 billion is 1.12 times revenue.
Flour Mills of Nigeria Plc, like other millers, have the lowest profit margins because it relies on imported raw materials (wheat) to meet production, and which exposes it to foreign exchange volatilities.
For instance, net profit margin fell to 2.02 percent in the period under review from 2.78 percent the previous year. Interestingly, the company incurred N491.21 billion in production cost, which is 93.39 percent of total revenue.
There are indications that the central bank will soon add wheat to the foreign exchange import exclusion lists in a bid to promote local production, but recent data from the United States Department for Agriculture stated that the country does not have the capacity to produce the product.
Unilever and Cadbury bucked the trend as they recorded margin expansions, but hard times lie ahead.
Analysts say sector players will have to embark on cost control measures in order to survive the headwinds.
“Most of them have already implemented hikes in prices to absorb the impact of inflation and FX liquidity constraints. Unfortunately, it is not the lasting solution,” said Gbolahan Ologunro, equity research analysts at Cordros Securities Limited.
“The way forward is optimizing plant capacity or redesigning manufacturing processes with more advanced technology to be able to produce goods at lower price,” said Ologunro.
While headline inflation moderated for the 6th consecutive month to print at 16.63 percent, it is below the 6-9 percent central bank target range.
On a segmented basis, food inflation printed at 19.57 percent year on year (y/y) in Sep-2021 compared to 20.30 percent in Aug-2021, a 73bps decline. On a m/m basis, the Food sub-index increased by 1.26 percent in Sep-2021, up 20bps from 1.06 percent in Aug-2021.
“Prices of many consumer goods products have been rising over the past two months and it perhaps likely reflects on the headline inflation numbers in the months ahead, especially as winding revenue may also reinforce upside risk for inflation,” said an analyst who does not want his name mentioned.