Nigeria: Ukadike – Port Congestion Remains a Challenge for Consumer Goods Companies

Consumers have gone through a whirlwind over the past year, dealing with limited purchasing power as well as limited choices on the shelves and a pandemic. Fast moving consumer goods(FMCG) companies themselves seem to have faced a lot of challenges as well. All these have implications on the companies, their stocks and investors. The Consumer Goods Analyst at Vetiva Capital Management, Chinma Ukadike discussed some of these scenarios. Excerpts:

How has inflation affected consumers as well as producers within the consumer goods space?

Reduced demand as individuals who used to bulk purchase, changed to buying when necessary. Individuals, who bought when necessary, looked to down trade brands, looking for cheaper, more affordable options and so on. Companies as well responded by offering value products, either through reduced Store-Keeping Units of existing products or outrightly introducing new products at lower prices. Although, some players were also able to increase prices to accommodate the increasing costs of production. Finally, many households simply deferred big-ticket purchases in response to lower income levels.

All that said, but of course, the COVID-19 pandemic didn’t help?

No, it didn’t. As with many sectors, (even though the consumer goods sector is more defensive than most), the slowdown in the economy severely impacted the sector; mainly from a reduction in income and consequently consumer purchasing power. We should also note that although the Pandemic hit severely across the entire sector, it affected subsectors in varying degrees.

Specifically, which sector was most affected?

Clear cut, the most affected was the brewery sector, given their large exposure to sales from bars and lounges, the pandemic seemed to have the most direct impact here. Sales fell by 3.0 per cent on average across the sector (18 per cent including Golden Breweries), dragging profits as well. So far, the pace of growth has been encouraging, as revenue has rebounded 65 per cent year-to date.

But all, was any sub-sector unscathed?

Largely, the sugar players and food producers still saw some growth within the year. Given that the border closure was still in place last year, a lot of volume growth from increased market share, really pushed up their topline. This is coupled with the fact that food is really a necessity, and whilst quantity demanded may be reduced or quality scaled down on their scale of preference, people still have to eat.

So far with the borders being re-opened, what does that look like for local companies?

Well, first, it means that they have to compete again with cheaper imported alternatives, especially in the food segment; and given the inflation being experienced in terms of production costs, that is quite a feat. However, for the sugar sub-sector, save for the possibility of unlicensed sugar seeping through the borders, there isn’t that much threat to them, given that they remain protected (under the National Sugar Master Plan) from imported refined sugar. On the other hand, it should be quite positive for local players in terms of exports. However, we are yet to see very strong indications of this.

You mentioned earlier, producers increasing prices amongst several strategies. This must have been very effective for margin?

That would really have been the case right, but with galloping costs from several fronts, whilst volumes may have improved, given that FMCG products are already low-margin, margins were negatively impacted. So far this year however, margins have improved. For example, in the brewery sub-sector, margins have improved 7.0 per cent percentage points year-on-year on average.

So, do you think we would see prices increase next year?

Definitely, as it is now, margins have suffered significantly from increased costs and these costs are still rising, mostly because producers import raw materials and have to source for foreign exchange (FX) partly in the parallel markets due to FX sourcing limits.

Furthermore, the Apapa port congestion remains a challenge. So, it follows that margins will continue to see a squeeze and I believe players will try to make up for that. Already, we are seeing some price increases here and there, however, players are trying not to rock the boat considerably and alarm consumers.

How are companies dealing with their FX challenges?

Many companies have been focused on the backward integration programme to improve local sourcing of raw materials. However, there’s only so much local sourcing that can be done especially considering the severe supply deficit for some materials like wheat and sugar. So, companies get what they can from the CBN and make up the difference mostly at the parallel market.

So far this year, what has it been like for these companies especially in terms of profits?

Even though margins have been hugely impacted, volumes (which really drive profit in the FMCG sector) are on the rebound, following strategies like SKU re-sizing that players have implemented. Thus, volumes are also seeing an improvement. So far, year-to-date, profits have grown 60 per cent y/y from a slump of 76 per cent y/y in 2020.

I believe last year, whilst some companies were able to still declare dividends, many of them were unable to match their previous payout ratio, what were the considerations?

A lot of things were unknown in 2020, companies were not sure if there was going to be a relapse into lockdown measures, which would have brought very severe consequences, and so, many of them had to try to shore up cash plus a lot of companies reported lower than expected profits which also impacted the amount of cash they had to spare for dividend purposes.

How do you think that will play out this year?

The outlook is definitely not as dire as last year’s, especially given that we expect these players to make better profits. However, we believe that many companies are still in a rebuilding phase and we may see them prioritize retaining profits.

So, what subsectors do you think we should really be looking out for?

Top on my mind is the food segment, especially the agro-allied players and the sugar producers (especially Flourmills and Dangote Sugar).

However, like I mentioned before, we are also seeing some encouraging performances from some of the brewery players, so, companies like Nigeria Breweries (although their Q2’21 performance was not as expected) may be good to watch.

Do you think we would see investors’ renewed interest in the consumer goods index?

So far this year, investors have really favoured the oil & gas and industrial goods sectors, which is to be expected, given the huge gains in international oil prices. However, we believe investors remain wary of the FMCG sector and are cautiously waiting on the sidelines for a significant incentive. We may see investors reward some well performing stocks after the Q3’21 earnings are released, but other than that, we don’t expect to see a significant change in sentiment towards the index.


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