Business
Dumping, local alternatives threaten profitability of established FMCG companies
By ADEBAYO OBAJEMU
Times are changing, and a new dynamic is emerging to disrupt settled arrangements in many spheres of life, no less affected are the fortunes of established multinationals in the Fast Moving Consumer Goods, FMCGs segment of the economy.
Panoply of emerging realities has conspired to threaten their profitability. The unrelenting onslaught of Apapa traffic gridlock together with inflow (dumping) of all manner of consumer goods in the country have continued to take their toll on the financial state of companies in the Fast Moving Consumer Goods, FMCGs, segment.
Nothing testifies to this frightening reality that has become the lot of these companies than their financial report for the first quarter (Q1) to March 31, 2019, which indicated that they are struggling with declining earnings and thinning profit margins amidst intrusion into their market share by new realities such as unrelenting dumping of alternative products from foreign countries, and new Asian companies in the country producing same products.
The companies under focus include Nestle Nigeria Plc, Cadbury Nigeria Plc, Unilever Nigeria Plc, Dangote Sugar Refinery Plc, Dangote Flour Mills Plc, NASCON Allied Industries Plc and GlaxoSmithKline, GSK Plc, recorded combined revenue of N172.4 billion, a 10.6 percent decline compared to N192.83 billion posted in the corresponding period in 2018. Their Profit Before Tax, PBT, also saw a marginal decline of 1.63 percent to N30.2 billion from N30.7 billion in Q1, 2018.
The Apapa gridlock constitutes a big threat to these companies which mainly located in Lagos. Recently, the Managing Director of NASCON, Paul Farrer, described the Apapa gridlock as one of the key risks in the company’s business, saying that the company has shifted some of its operations away from Apapa to Oregun and Port Harcourt, in response to the gridlock in Apapa.
He said the Apapa gridlock affected the movement of raw materials to Oregun, timely delivery of finished goods to customers and increased turn-around time of the company’s trucks. “We relocated 60 per cent of our Apapa Plant production capacity to our Oregun and Port Harcourt plants to reduce the effects of the gridlock. We also engaged third-party transporters to ensure timely delivery of our finished goods,” he said.
Speaking in the same vein, Founder and Chairman Honeywell Group, Mr. Oba Otudeko, said that the deplorable state of roads around the Tin Can and Apapa ports is already seriously weighing on businesses operating in the vicinity. He explained that most companies operating in the area are counting their losses as a result of the traffic gridlock around the ports, adding that it is affecting manpower, production and profit.
It should be noted that owing to the enormity of the problem and the outcry over the impact on businesses, the federal government recently constituted a Presidential Task Force on the Apapa traffic gridlock with a mandate to clear up the gridlock as well as restore law and order to Apapa and its environs within two weeks starting from May 24, 2019. After failing to meet its initial deadline of June 7, the Task Force is now expected to present a formal report at the end of its extended mandate today, June 24, 2019.
The Task Force is yet to make any significant headway as major roads leading to the ports are still locked up as at the time Business Hallmark visited the area. Despite the attendant effect of traffic challenges on the companies, the managements of the various companies have devised a way to control cost in order to remain in business. Business Hallmark checks revealed that some of the companies that import their manufacturing inputs now ferry them in barges through the Lagoon to Ikorodu and then truck to where their factories are located to avoid the delay brought about by the traffic situation.
Others are said to have resorted to funding through capital market, instead of money market to keep cost down. Consequently, cost of sales for the companies dropped by 5.8 percent to N118.84 billion from N126.16 billion a year ago. However, Nestle appeared to have a better outing during the period having recorded 5.3 percent reduction in cost of sales, while recording five percent and 40 percent increases in revenue and pre-tax profit respectively, a performance, financial experts attributed to the inelastic nature of the company’s core food segments.
Ambrose Omordion, chief researcher at Investa told this newspaper that, ” Nestlé understands the current challenge and is always working the call to cut production costs in view of current reality in the economy and the logjam at Apapa.”
It is true that Unilever brought down its cost significantly by 12.5 percent to N15.37 billion, its revenue and pre-tax profit went negative at -20.8 percent and -39 percent respectively.
On its own, Dangote Sugar also recorded 17.1 percent decline in cost, but its revenue for the three month period declined by 7.3 percent to N38.12 billion. Its pre-tax profit, however, rose by 27.4 percent to N10.7 billion. GSK seems to be worst hit, as its cost skyrocketed by 16.7 percent, while the revenue and PBT recorded steep decline of 72.8 percent and 87.5 percent respectively.
Like GSK, Dangote Flour Mills posted 4.6 percent increase in cost of sales and 13.4 percent decline in revenue while recorded outright loss before tax of N3.6 billion as against a profit of N2.3 billion made in the corresponding period of 2018.
Cadbury Nigeria, on the other hand, posted 7.3 percent increase in its cost. However, its revenue and pre-tax profit went up by 12.6 percent and 2,201 percent respectively. NASCON’s cost rose by 8.5 percent. Its revenue appreciated by 0.7 percent, while the PBT declined by 34.6 percent.
Many financial analysts and brand experts who spoke with Business Hallmark heaped the larger part of the blame of poor showing on the Apapa traffic gridlock as well as increased importation of illegal consumables, which they said, is hurting their profit margin of these companies. Wahab Mustapha, of Cordros Capital, a Lagos based investment house, said: “Most of them reported slower portfolio growth, basically because they are operating in intense competitive environment. Pricing environment was actually very bad for them.
That was why you see that their revenue was down year-on-year.”
He added: “When you think of the declining portfolio, what comes to mind is that most of them are still struggling from the Apapa traffic gridlock, making it difficult for them to evacuate products from the Port and distribute their products from the area. “For some of them, such as Dangote Sugar and the flour millers, they operate in intense competitive environment; they are still suffering from huge importation of some commodities like sugar and flour with the impact of this resulting in general price decline.” Additionally, he said that strained consumer wallets remained a challenge. “Consumers are yet to recover from the over 60 percent depreciation in the value of the Naira over a period of two years.
Omordion said inflation level has also doubled. So, the impact of the decreased wealth is impacting consumers’ purchasing power.” For them to survive, he said they have to bring down prices to, at least, fend off competition or to, at least, maintain the same level of market share.
Dr. Olufemi Omoyele, a brand analyst told this newspaper that the times are hard for most manufacturing companies, but there will be a rebound soon. “My take on the FMCGs remains modestly positive on the back of a gradual recovery in the economy. However, challenges to volume growth may persist due to bottlenecks to distribution. Pressure on volume growth and transport cost is likely to persist as the difficulty associated with the gridlock at the Lagos Port is unlikely to go away in the interim.”
An official of Manufacturers Association of Nigeria, MAN, who craved anonymity, criticized the corporate ethic of many of these companies under pressure, saying for many years, they refused to play their social responsibility role, and only take profit without paying back the society and environment where the money is made. “Now , the Asians, mainly Lebanese and Indians, and a sprinkling of Pakistani have come into the equation with cheap alternative products. ”
He advised the FMCG companies to work at keeping down cost. “They should be more cost conscious,” he stated. He said that though they have been able to pass cost to consumers through reduction in quantity of unit packs, but that has not positively impacted earnings due to myriad of other challenges.
David Adonri, Managing Director/CEO, Highcap Securities Limited, blamed the increased dumping of imported products for the incidence. He said that the imported substitute has reduced the market share of the companies.
Many spoken believe there is need for these companies to innovate, and bring new value addition in order to cope with challenge posed by the emergence of new Asian companies, which are though smaller in size and are privately owned, but are offering alternative products at far more cheaper prize. Take for example, the avalanche of alternatives to Omo.
Most experts who spoke say it is difficult to be totally positive on flour millers and sugar manufacturing companies, as the short-term expectation is dampened by the feedback effect of Apapa gridlock and smuggling activities on volume growth. They all agree there may be slight improvement in Apapa gridlock by year end or at least by early 2020.
The improvement is expected to give some of the companies that are involved in importation of their raw materials some respite. The pledge by federal government to clamp down on illegal importation of different products will also give them some respite in terms of pricing.
Omoyele, noted that he foresees these companies increasing prices going into Q3 and Q4 2019.
For their reactions, most of the companies, Unilever, GlaxoSmithKline and Nascon advised this reporter to check their first quarter financial report, while Cadbury did not react to text message sent to them for comment.
In terms of purchasing power, the introduction of new minimum wage should be positive for fast moving consumer goods companies as consumers may have more purchasing power.
