Business

Rising costs force FMCG firms to raise prices


Fast-Moving Consumer Goods (FMCG) companies in Nigeria have been forced to overlook consumers’ sensitivity to prices as they increased prices to cushion the effects of rising production costs and inflationary pressures, BusinessDay findings show.

A market survey of some products shows that the prices have increased by 50 percent or more over the last four months.

For example, Flour Mills of Nigeria’s Golden Penny spaghetti, which used to cost N250, is now sold for N450; the price of 250grams of Dangote sugar has increased from N100 to N200; while that of 350grams of Nasco cornflakes rose from N700 to N1,300.

The retail prices of pharmaceutical products including medication and home care products like soaps and antiseptics also increased. It was observed that other than the upward price review, some of these products have reduced in quantity.

According to a report by Cordros Securities on the Nigerian consumer goods sector, some companies have implemented substantial price increases to cushion the impact of currency depreciation on margins, especially food staples producers who implemented more robust price increases due to their products’ essential nature, which makes demand price inelastic.

“Industry players will continue to grapple with the high costs of operations, consequently we expect the price hikes to spur revenue growth and support earnings in 2022, although we remain cautious about the weak demand as consumers down trade or opt for cheaper substitutes,” the report said.

BusinessDay analysis of Nestle Nigeria, Dangote sugar, BUA, Unilever, and NASCON, which are listed on the Nigerian bourse, reveals that their cumulative cost of sale was N225 billion in the first quarter of this year, which showed a 37 percent increase from the N164 billion spent in the same period of 2021.

Although these companies recorded revenue growth of 31 percent, from N249 billion in 2021 to N326 billion in 2022, their profit after tax during the review period was N52.1 billion, which was a 29 percent increase from the N40.4 billion realised in the same period of 2021.

Since Nigeria’s economy experienced a recession in 2016 and 2020, macroeconomic fundamentals have not fared well as consumers have suffered a decline in purchasing power. This has caused a shift in their preference for essential items and affordable brands.

According to the National Bureau of Statistics (NBS), as of the fourth quarter of 2020, Nigeria had an unemployment rate of 33.3 percent, which experts expect to have increased since then as companies suspend operations or shut down.

The World Bank has estimated that the number of poor people in Nigeria will hit 95.1 million by the end of 2022.

Economic experts say that many manufacturing firms that are yet to recover from the COVID-19 disruptions are facing severe pressures as the Russia-Ukraine crisis rages on. They noted that manufacturers in Africa’s largest economy have suffered production hiccups as the supply of raw materials like wheat became limited and the price of diesel, a major source of energy, surged significantly.

Michael Olawale-Cole, president of Lagos Chamber of Commerce and Industry (LCCI), said the lingering Russia-Ukraine war has triggered a positive oil price shock with spillover effects on operating costs, raw materials, and inflation, with the potential implication of shrinking production of goods and services, especially for manufacturing and agriculture.

“With the cost of diesel at record levels and persisting poor power supply, businesses are running on unsustainable costs and producing at uncompetitive prices, this can lead to job losses as output is constrained due to the unbearable cost of production,” he said.

Segun Ajayi-Kadir, director-general, Manufacturers Association of Nigeria, expressed concerns about the over 200 percent increase in the price of diesel, saying it holds serious implications for the manufacturing sector, which heavily relies on it as a source of energy.

According to him, some of these implications are the continuous increase in production cost, which will affect productivity and profitability, leading to the possible closure of manufacturing firms; increase in unemployment, and reduction in government tax revenue.

Other than the global crisis, macroeconomic fundamentals have also been unfavourable for businesses, with the country recording double-digit inflation of 18.6 percent as of June 2022, according to the NBS.

There are fears that as this price increase may not fully cover the surging expenses of these FMCG firms, they will try to look for more avenues to cut costs which includes reduction of workforce.

Read also: FMCGs’ distribution expenses spike as inflation rises

Economic experts also say that if these conditions do not improve, manufacturers will continue to be pressured, and it is expected that more companies will implement a price increase in their operations going forward.

Rob Kleinjan, finance director at Nigerian Breweries, said during the company’s pre-Annual General Meeting media briefing in April that although the company’s Nigeria operations do not have a direct link to any importation from Ukraine or Russia, its input cost and marketing expenses have continued to increase significantly.

He specifically highlighted the rising cost of fuel and diesel, which has an impact on the production and distribution process, saying the company will have to review the price of its products upward during the year.

“Our cost of sales increased by 26.6 percent to N276 billion from N218 billion in 2020 driven by raw materials and energy cost, the company already absorbs these additional costs; the N10 per litre excise duty which the government wants to implement is an indirect consumer tax so going forward it will be passed on to the consumers,” he said.



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