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Flour Millers Laugh to the Bank as Bakeries Struggle to Pass on Costs

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Flour Mills of Nigeria Plc, Honeywell Nigeria Plc, and Northern Nigeria Flour Mills, have offered investors something other consumer goods firms couldn’t: solid earnings and revenue growth.

However, while the millers are having a good year and laughing all the way to the bank, most bakery’s in the country are finding it difficult to pass on costs in the form of higher bread prices to an ever weary consumer.

The milling firms delivered a surprise strong earnings growth and margin expansion even amid the economic downturn caused by the coronavirus pandemic and difficult business environment, according to MoneyCentral’s analysis of their most recent financial statements.

For instance, Flour Mills of Nigeria revenues spiked by 31.31 percent to N555.34 billion in the nine month ended December 2020; Honeywell Flour Mills revenues were up 41.12 percent to N82.15 billion as at December 2020, and Northern Nigeria Flour Mills revenue rose by 29.13 percent.

Despite the exogenous shocks caused by the devaluations of the currency and volatile foreign currency environment, the milling firms made money from their core business and have enough cash left to cover finance costs and operating expenses as combined gross profit increased by 45.89 percent to N84.72 billion in the period under review.

The Premium Bread Makers Association of Nigeria (PBAN) however in a recent statement lamented the high cost of purchasing baking ingredients in Nigeria.

The president of PBAN, Tosan Jemide, said in the period between March 2020 and August 2020, the price of flour which is a major ingredient increased from N10,500 per 50kg bag to N13,500 per bag. Sugar increased from N13,500 per bag, went as high as N29,000 and down to N19,000 per bag in the corresponding period.

Jemide added that the members of the association have been putting up with the price hike in the past six months without a corresponding increase in the prices of bread. He, however, said the bakers could no longer continue to subsidise the price of bread, as their profits have been totally wiped out.

“Most of us got loans with double-digit interest rates from banks and other financial institutions to fund our bakery projects and are finding it extremely difficult to meet our loan repayment obligations. Our Associations shall henceforth be responding correspondingly to any indiscriminate price increases by millers, sugar refiners, and ingredient manufacturers and suppliers with the same measure in the prices of bread,” Jemide said.

Jemide also kicked strongly against the decision of the flour millers, sugar refiners, and baking ingredient manufacturers to increase the prices of their products without due consultations with the stakeholders in the baking industry.

Flour Mills saw its profit margin increase to 2.81 percent in the period under review as against 1.46 percent the nine month to December 2019, while net income surged by 91.05 percent to N15.56 billion in the period under review.

Honeywell posted net income of N325 million as at December 2020 as against a loss of N825 billion the previous year while Northern Nigeria Flour Mills posted net income of N51.22 million in December 2020 from a loss of N212.31 million the previous year.

Analysts say the border closure facilitated an increase in the retail prices of most of the miller’s retail brands, and they expect the momentum to remain high despite the reopening of the land borders.

They added that the sugar segment will continue to sustain volume momentum over the near term, as they do not expect intense smuggling of the product at the moment.

Ayodeji Ebo, an investment analyst said the demand for the products of millers are inelastic and that consumers focused on basic necessities during the period of lockdown.

“They produce low end food items that do not suffer demand decline during an economic downturn,” said Ebo.

Chicago wheat futures peaked on Aug. 6 at $8.68 a bushel as Russia’s worst dry spell in 50 years damaged the crop in the world’s third-biggest grower of the grain. The March-delivery contract fell 1.66 percent to $6.3750 a bushel by 10 a.m. in trading on the Chicago Board of Trade.

Nigeria, which is Africa’s most populous country of more than 180 million people, may increase wheat imports by 5.4 percent to 3.9 million metric tons in the marketing year that began on July 1, the U.S. Department of Agriculture’s Foreign Agricultural Service said in a report last year. Imports from the U.S. may total 3.3 million tons, the department said.

“Imported wheat is our main input and the implication of a price increase is that we shall pass the cost to the consumers,” Shuaibu Idris, deputy managing director of Dangote Flour Mills Plc said last year. “We are running a business, not a charity.”

Jemide however kicked against the decision of the flour millers, sugar refiners, and baking ingredient manufacturers to increase the prices of their products without due consultations with the stakeholders in the baking industry.

“While we clearly understand their predicament, and their strong desire to remain profitable, it would be worthy of note to mention that they would be out of business if all the bakeries adopt their approach to profitability as the demand for flour-based products would drop significantly once the price exceeds a certain threshold.

“In reality, we have been busy helping them remain profitable while our businesses suffer because we are more in tune with the purchasing power of the consumer and are deeply concerned about food security,” he said.

Investors are becoming increasingly bullish on the shares of Millers, with analysts at Chapel Hill Denham maintaining a Buy Rating on the stock of Flour Mills with a 12 months’ target price of N37.04 per share.

Since 2018, Flour mills of Nigeria has engaged in a number of restructuring efforts aimed at streamlining the operations of the group for delivery of optimal returns. Most of these reforms were within its Agro-Allied segment where Premier Feeds, Premium Edible Oil, Golden Fertilizer and the Farms were classified within the segment, while Sugar was rotated out into a stand-alone segment.

The year 2021 will be tough for most consumer goods firms as weakening purchasing power and rise in cost are expected to persist.

Of course, consumers will not open their purse string this year as a 50 percent rise in electricity tariffs is expected, and petrol prices are expected to surge in the face of rising crude oil prices.

According to Fitch solutions, household income is estimated to drop by 3.5 percent in the 2020 full year (FY) This being the offshoot of the lingering effect of the coronavirus pandemic which led to a dip in foreign exchange receipt and slow-down in economic activities–there by prompting a recession in the Nigerian economy in the third quarter (Q3) 2020.

For bakers, it is practically impossible for them to pass on the high cost of production in the form of higher price to the already beleaguered consumers whose living wages have been stolen by spiraling inflation. Also, over 50 percent of the population of 200 million lives on less than $1.98 a day, while the unemployment rate jumped to 27.10 percent in the second quarter of 2020.

Inflation continued to rise reaching 15.75 percent as of December 2020, as consumer purchasing power continues to deteriorate.

The Association of Master Bakers and Caterers of Nigeria (AMBCN) however says a 50 per cent increase in retail prices of bread and other finished baked items may be inevitable in coming months.

Raji Omotunde, Lagos State Chapter Chairman of AMBCN attributed the proposed increase in prices to the inflated prices experienced in the purchase of baking ingredients.

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