Consumers, whose wallets are already squeezed, may have to shell out more money for their daily use products as consumer goods firms, which are facing inflationary pressure on their key raw material inputs, are considering a marginal hike on their products price to offset it.
Some companies like Nestle Nigeria, Nigerian Breweries, and International Breweries have already gone for price hike, while peer rivals are mulling passing on cost to the final consumer.
The prices of Maggi, Milo, and Nescafe, premium products of Nestle Nigeria, were higher year on year (YOY), which helped add impetus to revenue growth.
A bag of 50kg Sugar, produced by Dangote Sugar, the largest producer of the sweetener, averaged N19,000 in 2020, from an average of N14,000 in 2019.
International Breweries, the company struggling with huge debt that have resulted in recurring losses, has increased the price of key premium brands by 11 percent this year.
Analysts said such increases are expected since the price of the products had been stagnant for a period of four years while inflation has been spiraling in these periods.
“It is inevitable given the cost burden. Nigerian Breweries had hiked prices twice in 2020, but this has not been significant to the point of making the customers disgruntled. It’s gradual,” said Abiola Gbemisola, research analyst at Chapel Hill Denham Limited.
“You cannot buy the same product at the same price for four years,” said Gbemisola
The continued increase in headline inflation and the incessant devaluation of the currency by the central bank to stabilize the economy and bad policies by the government such as the border closure means margins of companies will continue to be under pressure.
The headline inflation hit a seventeen-month high of 16.47 percent in January 2021, according to data from the National Bureau of Statistics (NBS).
It is interesting to note that the ten (10), members of the Monetary Policy Committee of the Central Bank of Nigeria (CBN) all unanimously agreed during their review of the development of the global and domestic economic and fundamental environment in 2020 that inflationary pressures and infrastructure bottlenecks are antithetical to the growth of the real sectors.
“Among others, what can be seen is the dominant influence of high production cost and distribution bottlenecks in the current inflation dynamics. Of course, the effect of the easy stance of monetary policy cannot be completely discounted,” said Adamu Lametek, a committee member.
The combined costs of the largest consumer goods firms in Africa’s largest economy increased by 19.76 percent to N1.23 trillion in December 2020 from N1.02 trillion as at December 2019, according to data gathered by MoneyCentral.
On average, they are spending more on input cost to produce each unit of product as the combined average cost of sales rose to 75.72 percent in the period under review as against 75.04 percent the previous year.
Companies pay through their nose to run generator plants at factories and head office as electricity from the grid remains unreliable, and that further undermines margins.
Also, they are reeling from operating inefficiency as average industry net profit margin fell to 3.80 percent in December 2020 from 4.12 percent the previous year, according to data gathered
Net profit margin measures how much net income is generated as a percentage of revenues received.
Net profit margin helps investors assess if a company’s management is generating enough profit from its sales and whether operating costs and overhead costs are being contained.
Consumers May Remain Price Sensitive And Downgrade to Cheaper Brand
The hike in utilities (fuel and power) was ill timed and has compounded the woes of the consumers who are already hard hit by the tough operating environment and the coronavirus pandemic that disrupted demand as the government imposed a lockdown policy to curb the spread of the disease.
Of course, consumer wallets have fewer cash and they cannot afford luxury items as inflation has stolen workers’ wages, while over half of a population of 200 million people are without a job and are living below 1.98 a day.
According to the NBS Labor survey, Nigeria’s unemployment rate was 27 percent in the second quarter of 2020-four percent point higher than the 23 percent recorded in the third quarter of 2018.
Supported by a rebound in crude oil price and contributions from the banking and telecommunication sectors, the country turned to positive growth territory in the fourth quarter of 2020 after the Covid-19 crisis battered an already fragile economy.
However, since the emergence from recession in 2017, GDP growth has been underwhelming, falling short of the nation’s population growth of 3 percent, leading to falling GDP per capita.
The aforementioned challenges mean consumers will continue to be price sensitive and downgrade to cheaper brands and that is double whammy for companies who are mulling price hike to compensate for rising cost of production.