Against the backdrop of spiralling inflation, Nigeria’s consumer goods manufacturing sector has recorded a 25 per cent rise in the cost of production in the first half of 2022, H1’22.
But this level of high cost is hugely above the average inflation rate of 17 per cent during the period.
Findings in some of the leading companies in the consumer goods segment in H1’22 show that cost of production was N788.7 billion in 2022 as against N630.7 billion in H1’21.
This comes even when the companies are reporting sluggish growth, and in many cases, an outright decline in output levels.
Company executives and industry experts have listed the source of the cost pressures to include energy cost issues around diesel prices, increasing costs associated with foreign exchange for imported raw materials, high transportation costs, and increased labour expense, among others.
The companies in the basket of the findings, include Nestle Nigeria Plc, Dangote Sugar, BUA Foods Plc, Nigerian Breweries, Guinness Nigeria Plc, Honeywell Flour Mills Plc, Cadbury Nigeria, PZ Cussons Industries, NASCO Allied Industries Plc, and GSK Consumer Nigeria Plc.
Also in the basket of cost leaders in the consumer goods sector are, Unilever Nigeria, Northern Nigeria Flour Mills, Union Dicon Salt Plc, Nigerian Enamelware Plc, International Breweries, Golden Guinea Breweries, Multi- Trex Integrated Foods Plc, amongst many others examined by Financial Vanguard.
Amongst the cost leaders are NASCO which recorded about 57.6 per cent rise to N16.8 billion in H1’22 as against N10.6 billion in H1’21. It was followed by GSK Consumer Nigeria Plc with operating costs rising by 56.1 per cent to N11.0 billion from N7.1billion in H1’21, while Champion Breweries went up by 54.0 per cent to N2.2 billion from 1.4 billion in H1’21.
Nestle Nigeria Plc recorded a 43.4 per cent rise in cost to N75.3 billion as against N52.5 billion in H1’21 and Dangote Sugar recorded a 41.9 per cent rise to N146.6 billion as against N103.5 billion in HI’21.
Meanwhile, in absolute terms, companies with the high cost of production include BUA Foods Plc recording the highest cost at N168.9 billion in H1’21, Nigerian Breweries recorded N146.6 billion, and Dangote Sugar recorded N146.6 billion. Guinness Nigeria Plc recorded N134.2 billion and Nestle recorded N75.3 billion.
In an apparent reflection of the high cost of production transferred to consumers, the consumer goods sector grew in revenue even while the purchasing power of consumers was weakened by inflation, growing unemployment, and other macroeconomic headwinds during the period.
Both the turnover and profit growth rate of these companies in H1’22 surpassed both Gross Domestic Product, GDP, growth rate and inflation rate which stood at 3.54 per cent and 18.6 per cent respectively in the first half of the year.
Specifically, the aggregate turnover of the 18 leading companies in the consumer goods manufacturing segment increased by 29.6 per cent to N1.16 trillion in H1’22 from N892.3 billion in H1’21.
More impressively, their Profit Before Tax, PBT, grew by 56.1 per cent to N173.85 billion in H1’22 from N 111.4 billion in H1’21.
Experts in the industry noted that inflationary growth was behind the performance of the Consumer Goods sector, adding that they must have transferred much more than their costs to the consumers going by their turnover level amidst declining purchasing power which had restrained effective demand.
However, they noted that most of the companies also did well in managing costs, given the impressive performance in their profit growth rate.
Commenting on the performance of Nigerian Breweries, Company Secretary/Legal Director, Uaboi Agbebaku, said: “The cost of sales increased by 18.3 per cent, from N131.34billion in H1, 2021 to N155.35billion in 2022 in the same corresponding period.
Marketing, Distribution, and Administrative expenses also rose by 44.6 per cent, from N58.42billion in H1, 2021 to N84.45billion in H1, 2022, driven by the increase in commercial activities post-COVID, rising diesel prices and higher wages arising from collective labour agreements.”
Uaboi also noted that “although interest expenses were lower, the net finance cost was higher due to foreign exchange losses arising from a higher cost of meeting foreign obligations to overseas partners.”
Looking into the future of the company’s cost issues Managing Director/CEO, Guinness Nigeria Plc, Baker Magunda, said. “Going into the new fiscal year, we are conscious of the continued challenging operating environment with double-digit inflation and pressured consumer income spending.
“However, we will continue to focus on our strategy – optimising our route to consumer, innovating at scale to satisfy our consumers and improving cost control – as we continue to emerge stronger from the current crisis.
We remain confident about the execution and resilience of our Total Beverage Alcohol strategy as a key driver of sustainable growth in the market.”
Commenting on the cost issues, Analyst and Vice Executive Chairman of Highcap Securities Limited, David Adonri, said: “Actually, the rise in the cost of production during this period was pushed to the consumers even as their purchasing power went down. So, inflationary growth was behind the performance of the Consumer Goods sector.
The higher turnover by the sector can be attributed to the pass-over of costs to consumers. At the same time, the companies managed their cost of production effectively.”
On the projection for H2’22, he said: “Performance of Consumer Goods sector contributed immensely to the outstanding performance of the equities market in H1 2022. Sustenance of that performance in H2’22 is seriously in doubt.
“Since June 2022, equities have been losing steam. This is mainly because of deteriorating macroeconomic conditions in Nigeria and the weakening crude oil market. These will hurt the resilience of the Consumer Goods sector as consumer resistance to higher prices of goods set in.
“The capital market is now also delicately poised to encounter the adverse impact of insecurity and heightening political risk in H2 2022. Consequently, this sector may suffer the same fate as the entire capital market.”
Commenting on the performance of the Consumer Goods sector, Analyst/ Investment Banker and CEO, Wyoming Capital and Partners, Tajudeen Olayinka, said: “The rising inflation had eroded the purchasing power of the people as costs were pushed to consumers of these products. The performance of the sector could be attributed to the capacities of some listed companies to adjust to the variability of costs and cost pressures in the short run; capacities to adjust to inflation. It also demonstrates the nature of demand in the sectors; an indication of relatively inelastic demand for goods and services. It could also be as a result of management efficiency.”
On sustenance of performance in H2’22, he said: “Given the nature of demand and capacities to adjust to inflation by businesses in the sector, the current performance could be sustained in the second half of the year.”
Commenting as well, analyst and Head of Research and Investment at Fidelity Securities Limited, Victor Chiazor, said: “For the Consumer Goods segment, it was a case of passing the cost to the final consumer as most of the players were able to maintain their profit margins by passing on their rising input cost of goods to the final consumer.
“However, if the economic activity slows and the purchasing power of the consumer fails to improve, the consumer goods sector may suffer a drop in volume of goods sold due to weak income levels. This will definitely affect the revenue and profit level of the companies.”
In his reaction, analyst and Managing Director, APT Securities and Funds Limited, Mallam Garba Kurfi, said: “The rising cost is as a result of the inflationary pressure which was passed to consumers and hence increases in turnover.
“The increase in profit is due to efficiency in managing the cost of production. No doubt inflation has impacted on the consumer purchasing power and if economic activity is not enhanced it may affect the manufacturers in the long run.
