Consumer Goods Companies May Cut Workforce Due to High Operating Costs
May 15 (THEWILL) — The performance of Nigeria’s leading Fast Moving Consumer Goods (FMCG) companies was severely impacted by a challenging operating environment in the first quarter of the year (Q1 2022). Spiraling inflation, falling consumer demand, misguided policies, and more have combined to create a regime of high operating costs for companies surveyed by THEWILL.
An analysis of the first quarter 2022 interim reports found that companies were struggling to increase their margins. Their profits and revenues showed an average growth of 50% year over year, while the six major cost/expense indices showed an average increase of 92%. Selected major cost areas include tax expenses, cost of sales, administrative expenses, sales/marketing distribution, raw materials/inventory, and employee expenses/entitlements.
Data from the companies’ interim reports published on their websites showed a significant increase in their operating costs, which could lead to a reduction in the scale of the companies’ operations, or an outright reduction in order to stay in business. Stakeholders and industry experts say companies need to take drastic measures to avoid falling into the quagmire of high operating expenses as inflation rages.
The top six FMCG companies cited and interviewed are Nigerian Breweries Plc, Unilever Nigeria Plc, Nestle Nigeria Plc, Guinness Nigeria Plc, Cadbury Nigeria Plc and Dangote Sugar Refinery Plc. They have a combined market capitalization of 2.3 trillion naira and constitute more than 60% of the total market capitalization of the consumer goods sector, which stands at 3.36 trillion naira as of Friday, May 13, 2022.
The six companies’ combined revenue for the first quarter of 2022 was N462.2 billion from N328.4 billion, reflecting an increase of 40.8%, while profit after tax (PAT) increased by 60.5% to reach 50.3 billion naira year-on-year from 31 billion naira. 0.4 billion during the corresponding period. On average, the two revenue-generating windows, combined, increased by 50% in the first quarter of 2022.
Nigerian breweries, Nestle and Dangote Sugar recorded the highest revenues of N137.8 billion, N110.3 billion and N94.5 billion respectively during the period; while Nestle, Nigerian Breweries and Dangote Sugar posted the highest PAT of N17.9 billion, N13.7 billion and N8.9 billion respectively.
The highest spending window recorded by the six surveyed companies was in cost of sales (COS), which increased from N216.3 billion in Q1 2021 to N269.9 billion in Q1 2022, a 24.8% increase. COS is the cumulative total of all costs used to create a product or service that has been sold. It represents the direct costs related to the manufacture of the goods and services that are sold. Nigerian Breweries, Dangote Sugar and Nestle posted the highest COS of N75.4 billion, N75 billion and N67 billion, respectively.
Companies’ raw/packaging stocks showed a total of N161.4 billion over the three months of the year, a 20% increase from the N134.7 billion spent during the past year. the corresponding period in 2021. The Nigerian Breweries report showed N54.7 billion worth of raw material/packaging stocks during the period. The others are Dangote Sugar and Nestlé with N48.2 billion and N32.3 billion respectively.
Employee expenses/entitlements over the period increased by 23% to N63.6 billion from N51.8 billion in the first quarter of 2021, with Unilever recording the highest employee/staff expenses/entitlements high of 37.9 billion naira, followed by Nigerian breweries with 13.6 naira. billion. The other highest figure was that of Nestlé which recorded 8.4 billion naira.
Sales/marketing/distribution expenditure for the six companies totaled N57.9 billion compared to N40.5 billion for the corresponding period, reflecting an increase of 43.3%. Nigerian breweries recorded N32.2 billion, followed by Nestlé and Guinness with N14.3 billion and N8.3 billion respectively.
Tax expenditures of surveyed companies increased by 66.5% to N26 billion, from N15.6 billion in the first quarter of 2022, with Nestlé, Nigerian Breweries and Dangote Sugar posting the highest: N9.9 billion , 7.2 billion naira and 4.8 billion naira respectively. Two companies recorded net losses on foreign exchange transactions: Nigerian Breweries N1.9 billion and Guinness N286 million.
With their profit/revenue windows showing an average growth of 50% year-over-year, against an average increase of 92% in the six major cost/expense indices sampled, experts are expressing concern about the ability of the sector to deal with the impending headwind. The former chief executive of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf, has expressed concern that some businesses may close their doors if their customers can no longer afford to pay. buy their products.
“It takes a lot of creativity and innovation from companies so they can continue their business,” Yusuf said, explaining that the trend could create four scenarios.
He posited that companies can find a way to divide their products into smaller units that the consumer can buy or reduce their operations by reducing the size of their workers or reducing their working hours. Moreover, they can pass on the additional cost to their consumers by increasing the price of their products.
“In the worst case, businesses could close because it’s better to be zero than negative,” Dr Yusuf, who is now the CEO of the Center for Promoting Private Enterprise (CPPE), told THEWILL by telephone. .
High operating cost will undo recovery gains for FMCG businesses after the twin tragedy of 2020’s COVID-19-induced recession and 15-month land border closures that offered a glimmer of hope for committed small businesses in upstream integration. Politics. Backward integration is a practice where companies are encouraged to grow their own raw materials by buying their suppliers or creating farms to grow products for their factories.
Operators in the SME space from various sectors, especially agriculture and transport, have benefited from the policy while FMCG companies are making strides in supporting and implementing the policy. The fall in the fortunes of the sub-sector will have a severe impact on the margins of small businesses operating at various points in the value chain.
For example, Nestlé Nigeria planned to engage 5,000 smallholder farmers for the supply of raw materials for its agro-industrial activities. The initiative, “Inclusive Grain Value Chains Development Project”, is in partnership with IDH – a sustainable trade initiative and TechoServe.
Nestlé revealed that the objectives of the project are to: work with six small and medium-sized enterprises (SMEs) that aggregate crops and supply them to Nestlé factories; aggregators and sub-aggregators will receive training in proper grain handling, storage and testing, as well as entrepreneurial and financial skills; while logistics partners will receive training on the proper handling and storage of grain during transit.
Nigerian Breweries has stepped up local production of sorghum and cassava to boost local sourcing of raw materials for its factories. FMCG has made significant progress towards the development and commercial cultivation of sorghum and its use by industry since the 1980s.
FrieslandCampina WAMCO Nigeria has developed its local supply of raw milk in an effort to support backward integration, an initiative that has provided a sustainable source of income for nearly 2,000 farmers (including 900 women).
Manufacturers in the milling industry have been taking steps to accelerate their pace of upstream integration lately. Flour Mills of Nigeria Plc has invested in Thai Farms and other agricultural projects to grow feedstock for most of its processes. Cadbury Nigeria has established a cocoa processing plant in Ondo.
The contested performance of FMCG companies emanates from the rising cost of goods and services that is eating away at corporate profits to levels not seen since 2017. This is despite price adjustments being made across the board by most consumer goods companies. .
The latest report from the National Bureau of Statistics (NBS) indicates that Nigeria’s inflation rate is 15.92%, down from 15.7% in February. Rising operating costs for many companies revealed declines in gross margins that negatively impacted profitability growth.
Specifically, Nigerian businesses spent a huge amount on electricity in the first quarter of 2022 as the cost of energy increased significantly in most countries around the world. Growing power cuts are making the situation worse by forcing businesses and households to buy more diesel and gasoline to run generators. The cost of diesel sold can be as high as N850 per liter in some parts of the country, while some companies have had to cut working hours in order to manage costs.
The spiral effects also extended to the cost of transport due to the gasoline shortage that persisted for six consecutive weeks, caused by the importation of adulterated fuel. Notably, the high cost of operating expenses is trashing the entire economic landscape, hitting hard small and medium-sized enterprises (SMEs) who are the direct beneficiaries of the FMCG recovery phase after the COVID-19 pandemic. While price increases have helped cushion rising costs for some companies, experts forecast a further drop in profits in the short to medium term if current inflationary trends persist.
Last month, the Manufacturers Association of Nigeria (MAN) warned that high diesel costs used by its members could result in high cost of goods and services due to escalating production costs.
“Knowing that diesel has been deregulated removes the question of a cost buffer. The law of supply and demand is at play here and since we have historically lacked local refining capacity, we are left at the mercy of the vagaries of the international price and its geopolitics. As long as the price of crude oil continues to rise, the price of AGO will also skyrocket,” said the Managing Director of the Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir.