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Nigerian Consumer Goods Manufacturers Ramp up Assets to Increase Sales

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Nigerian consumer goods manufacturers are taking advantage of the relaxation of  lockdown measures and higher consumption capabilities to increasingly deploy fixed assets to generate higher sales.

The elephant in the room however, remains the concerns around how exchange rate, rising energy cost exacerbated by nationwide blackout in the first quarter of 2021, and the Russia-Ukraine war, will impact cost structure.

For the year ended December 2021, the largest Fast Moving Consumer Goods Firms (FMCGs) saw the fixed asset turnover (FAT) ratio increase to 22.18 percent from 21.90 percent as at December 2020, according to MoneyCentral calculations.

A higher fixed asset turnover ratio means that the company is using its investments in fixed assets effectively to drive up and generate sales.

In other words, this ratio is used to measure a company’s return on their investment in fixed assets – which include property, plant and equipment.

Further analysis of books of these firms shows they collectively grew sales by 38.98 percent to N2.68 trillion as at December 2020 from N1.93 trillion the previous year.

As the business activities continue to gain momentum, firms are motivated to acquire property plant and equipment (PPE) as they spent N170.15 billion on capital expenditure as at December 2021.

The Nigerian economy grew by 3.98 percent year on year (yoy) in the last quarter of 2021, according to the latest data by the National Bureau of Statistics (NBS).

FMCGs are also able to use the resources of their shareholders in generating higher profit, but stocks remain overvalued while an improvement in profit margins enabled them to pay dividends to owners even as some cut dividend payments.

The average industry returns on average equity (ROAE) rose to 30.97 percent in the period under review from 24.65 percent the previous year, according to MoneyCentral calculations.

The average industry net profit margin increased to 7.20 percent in December 2021 from 5.68 percent the previous year.

The unpredictable macroeconomic environment has soured analysts’ optimism that resilient consumer goods firms will ride out of the wave in 2022.

Of course, the worsening and deteriorating electricity supply and the skyrocketing price of diesel oil does not bode well for firms who are already struggling with rising cost of production.

The Russian-Ukraine war will inevitably stoke inflation and further lead to erosion in the consumer purchasing power because the two countries are the largest producers of wheat and other grains.

Nigeria relies mainly on imported wheat to meet domestic demand, importing 640,000 tonnes in 2021 based on data from USDA.

In the first quarter of 2021 alone, Russia’s wheat exports to Nigeria were valued at N37.2 billion based on news reports.

Bread, pasta, crackers, many cakes, and many other foods are made using flour.

The geopolitical tensions indicate consumers will have to contend with high prices that will further lead to the erosion of consumer purchasing power, a double for a country where over 50 percent of a population of 200 million live on less than $1.98 a day.

The February headline inflation climbed 10bps to settle at 15.7 percent year on year (y/y), from January’s 15.6 percent, according to NBS data.

Data from MoneyCentral shows the largest consumer goods firms collectively incurred N551.01 billion as costs in December 2021, which is 25.81 percent higher than 2020’s N437.97 billion.

On average they spend N0.74 on cost of sales to produce each unit (N1) of product, and the flour millers expend more because raw material costs are more susceptible to fluctuations in global price of the grains while the business requires huge plants and equipment.

For instance, Flour Mills of Nigeria (FMN) spent N0.90 of input cost to produce (N1) units of products. Honey Flour Mills and Northern Nigeria Flour Mills expend N0.90 and N91 respectively.

Analysts at Chapel Hill Denham say pending the time FX clarity is achieved, the existing FX constraints, supply chain disruptions and weak disposable income are all factors that will continue to undermine growth in the manufacturing sector.

“The need to boost the manufacturing sector is pertinent to achieving the country’s output projection, and if structural constraints remain unaddressed, growth in the sector will remain lackluster,” said analysts at Chapel Denham Limited.

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