Business
Forex: Firms adopt local raw materials to reduce dependence on imported inputs
...as DIL invests $700m to stem De-United, FMN competition
Business Hallmark’s findings have revealed that Nigerian manufacturers and firms are gradually coming out of the shadows to challenge the dominance of foreign Multinational Corporations (MNCs) in the nation’s manufacturing sector.
The indigenous firms, checks revealed, have been registering strong performances in the manufacturing industry, thanks to their strategic adoption of backward integration.
Their relatively cheaper but qualitative products are taking over the market, and in some cases, outrightly displacing iconic brands produced by struggling foreign multinational firms that are daily exiting the country.
Not too long ago, iconic brands like Coca-Cola, Fanta, Pepsi, and Mirinda by Nigerian Bottling Company (NBC) and Seven Up Nigeria Plc; Blue Band butter, OMO, and Sunlight detergents by Unilever Nigeria; Ariel detergent, Pampers diaper and Always sanitary pad by Procter & Gamble; Close Up and Maclean toothpaste by Unilever and GlaxoSmithKline; Elephant Detergent by Paterson Zochonis (PZ) and other international brands ruled the nation’s consumer products market.
Today, Made-in-Nigeria products by Nigerian firms and their Asian counterparts like Good Mama and De Waow detergents, Bigi drinks, My My and Dabur Herbal toothpaste, Golden Penny butter, Spaghetti, Macaroni, and instant noodles now dominate market shelves.
It would be recalled that President Bola Tinubu had in June 2023, scrapped the multiple exchange rates system operated by the Central Bank of Nigeria (CBN) for decades, effectively floating the naira.
As a result, the naira immediately shed about 41 percent, selling for N660 to the dollar at the end of June 2023 in the official market, against the N463 selling rate pre-devaluation.
The naira continued its spiral dive by selling above the N1,900 mark against the dollar in February 2024 before it started recovering mid-2024 on the back of several factors, including improved crude oil production and earnings, monetary reforms by the CBN and improved dollar supply into the market. The Nigerian naira currently trades N1,503 in the official market and N1,555 in the parallel market.
The fall in the value of the nation’s currency complicated matters for import-dependent businesses already grappling with sky-high price levels occasioned by high energy costs, insecurity, poor road networks, and dwindling purchasing powers of buyers.
According to available data, 16 multinational firms unable to cope with the challenging operating environment in Nigeria exited the country between July 2021 to July 24.
They included United Kingdom-based Diageo, which exited the country after selling its 58.02% stake in Guinness Nigeria to Tolaram Group, a Singapore headquartered firm.
Before Diageo, others like GlaxoSmithKline (GSK); Unilever and Sanofi-Aventi Nigeria, Kimberly-Clark, manufacturers of Huggies and Kotex brands of diapers, as well as US-based Procter and Gamble had either exited completely or reduced their exposure in the country by halting the production of loss-making products.
On Friday, February 14, 2024, the local unit of Heineken NV, Nigerian Breweries Plc (NBPlc), announced that it recorded another FX-induced loss making for the second consecutive year as it posted N144.9 billion in net loss in FY 2024. The firm blamed the loss on the unification of the multiple foreign exchange rate windows by the present administration in 2023.
The beer and non-alcoholic beverages maker in its audited accounts released on Friday, said it recorded the negative bottom line even though sales improved by 80.8 per cent, taking revenue to a new milestone of N1.1 trillion.
It added that the direct cost of production rose to 70.5 per cent of turnover from 64.5 per cent as the cost of imported raw materials eroded revenue.
The spending on raw materials and consumables more than doubled to N615.5 billion during the review period, underscoring the gravity of FX pressures.
Net loss on foreign exchange transactions stood at N157.6 billion, 2.8 per cent higher than 2023.
“Foreign exchange volatility and limited access to foreign capital created additional hurdles for businesses, while the lingering effects of the fuel subsidy removal and Naira devaluation significantly increased operating costs across industries”, the company stated in its earnings release.
The beer and non-alcoholic drinks giant consumer added that it used the proceeds of its last year’s rights issue to significantly reduce future currency risks.
The company CEO, Hans Essaadi, had in April 2023, said that imports account for almost half of Nigerian Breweries’ input costs, leaving it at the mercy of exchange rate swings.
However, while the fortune of American and Western European-based firms operating in the country has continued to nosedived, local firm owned by Nigerians and their Asian counterparts are flourishing, gradually taking over the markets left behind by exiting MNCs and their non-competitive products.
Some industry experts who spoke on the rise of indigenous firms attributed their resurgence to their strategic adoption of backward integration which has largely insulated them from Foreign Exchange (Forex) shocks, unlike their foreign counterparts who still source majority of their feedstock from abroad.
According to the stakeholders, backward integration has helped alleviate some of the issues relating to the depreciation of the naira.
BH reliably gathered that many local producers have been able to insulate their businesses against external shocks, especially the sourcing of raw materials locally. This, it was learned, has made their products to be relatively cheaper and more competitive in the already saturated consumer market.
Many of the companies, sources informed our correspondent, apart from directly going into the production of the materials needed for the production of their goods or entering into off-taking deals with producers to produce the materials for them, had entered into mergers and acquisition deals with local suppliers of raw materials, which gives them more control over earlier stages of their supply chain.
One of the companies that has been able to record success with its backward integration policy is Chicken Republic.
The eatery business, a leading integrated food company that operates quick service restaurants, poultry and bakery business gets broiler chicken supply directly from its biggest poultry farms in Ogun, Oyo States, and the rest from sizable farms scattered across the country
As a result, Chicken Republic has been able to outshine its peers that buy directly from vendors that import expensive poultry products from abroad by offering cheaper products to its teeming customers.
“We have our own farms, especially poultry and crop farms, where our farmers rear and cultivate various farm produce like chicken, tomatoes, and chilli pepper, which constitute over 60% of our feedstock.
“The management had the foresight of pumping most of the funds gotten from venture partners into direct farming, unlike our competitors, who heavily invested the funds they received in upgrading their outlets and acquiring production equipment that kept depreciating.
“As a result of directly producing and supplying our own raw material needs, prices in our restaurants have been relatively stable. They are not subject to price volatility, despite the rapid inflationary trend in the country amid low consumer purchasing power”, a source in the company, who spoke on the condition of anonymity, informed our correspondent.
Another Nigerian firm forced to look inward in a bid to beat the persistent forex illiquidity is the BUA Group owned by Kano-born billionaire, Abdulsamad Rabiu.
According to BH findings, industries under Abdulsamad’s BUA Group, including his cement plants and sugar refinery, have all switched from imported coal to locally sourced coal and Liquefied Natural Gas (LNG) for their energy needs.
Multiple sources within the BUA Cement Sokoto plant confirmed a recent revelation by the Chief Executive Officer of BUA Cement, Mr. Yusuf Binji, that the cement maker had resorted to the use of locally sourced coal and liquefied natural gas rather than imported coal to withstand the challenges faced in sourcing foreign exchange.
According to the sources, who spoke to our correspondent on the condition of anonymity, BUA’s Sokoto cement plant is now powered by a dual-purposed coal and gas-fired Independent Power Plant (IPP).
“The conversion cost the company (BUA Cement) millions of dollars to achieve. But it is quite worth the deal as millions of naira are saved daily from getting our power needs locally”, a source in the cement firm informed our correspondent.
The source’s account was corroborated by BUA Cement’s Corporate Affairs Manager, Mr. Otega Orgra, who described the move as a strategic decision made for efficiency gains and to reduce the firm’s forex exposure on coal imports.
“We started the conversion of the plant in 2021 and it is now completed. The BUA Cement’s Sokoto plant now runs on locally sourced coal and LNG, rather than the previous mix of local and foreign sourced coal and LPFO. LNG will also be used to power engines used in generating electricity and will replace LPFO and AGO”, Otega stated.
BUA Cement is not alone in the ongoing my ve to abandon foreign coals for locally mined coals and LNG. Lafarge and Dangote Cement companies, which incurred N263 billion in fuel costs from January to September 2022, have also cut down on their dependence on imported coals and fuel. For instance, Dangote Cement commissioned its alternative fuel feed system (gas and coal) at Obajana lines I and V, and Ibese line II in November 2023.
Apart from these, sources in Dangote Cement informed BH that the management of the company is also ramping up its investment in Compressed Natural Gas (CNG) to reduce its AGO (diesel) usage.
In the same vein, the Dangote Group is accelerating its Sugar Backward Integration Plan with an investment exceeding $700 million in sugar production.
The huge investments, according to the group, is aimed at boosting local production and ending raw sugar importation in Nigeria.
“We are actively executing the Sugar Backward Integration strategy and have committed over $700 million to land acquisition, machinery, infrastructure, manpower, community relations, and corporate social responsibility initiatives to ensure Nigeria ends raw sugar importation”, the Regional Director, Lagos/Ogun, Dangote Industries Limited (DIL), Tunde Mabogunje, said at the weekend.
However, BH reliably learned that Dangote’s resolve to accelerate its Sugar Backward Integration program was necessitated by the desire to stop the incursion of competitors, especially Flour Mills of Nigeria (FMN) Plc, the manufacturer of Golden Penny products, such as Golden Penny Sugar, Golden Penny Spaghetti and Golden Penny Macaroni, into its market.
BH checks at selected supermarkets and stores in Lagos revealed that most buyers now go for Golden Penny products, which are relatively cheaper than Dangote Foods products.
For instance, while 250ml, 500ml, and 1kg of Golden Penny Sugar sell for N500, N1,000, and N2,000 respectively on average, Dangote Sugar’s 250ml, 500ml, and 1kg packs sell for N650, N1,300, and N2,500, a price difference of between N150 and N500.
Industry sources informed BH that FMN Plc has been able to produce cheaper consumer goods like sugar, spaghetti, and Macaroni because of the advancement in its backward integration program.
“Producers like De-United Foods Nigeria, manufacturers of Indomie Noodles, and FMN are early starters in the noodles business, unlike Dangote, which entered the business late.
“As a result of their ‘first comer’ advantage, they had invested heavily in infrastructure like grain farms, where products like sugarcane used in making granulated sugar and wheat used in the production of noodles and pasta are grown.
“What Dangote is trying to do now is catchup. If you can remember, he (Alhaji Aliko Dangote) cashed out by selling his instant noodle business to De-United Foods Industries owned by Tolaram Group in November 2015, when his noodles could no longer compete with Indomie Noodles”.
“We are seeing the reverse in fortune in the nation’s downstream petroleum sector, where Dangote is using his advantage as a petroleum products refiner to deal with importers of the products, who cannot compete because of the volatility in the foreign exchange market”, said Inumidun Bakare, an investment banker based in Lagos.
Other industries that have looked inward for survival also include the detergent, bear/beverage, pharmaceutical, and processed foods sectors.
For instance, leading Nigerian carbonated drinks, toothpaste, and detergents manufacturers, Rite Foods Limited, producer of Bigi drink products; Eko Supreme Resources Nigeria Limited, producer of Good Mama detergents and liquid washing soaps; Daraju Industries Nigeria Limited, producer of My My toothpaste and De Wave Industries, producer of De Wawe detergents, among others, BH learned, have been able to cut down on production costs by getting their feedstock from Dangote Petrochemical Plant.
The plant produces different high-performance grades of terephthalic acid and ethylene glycol used to produce PET plastic bottles, phenol and cumene used as preparatory agents by pharmaceutical companies for producing drugs, as well as benzene and toluene for making detergents.
While local pharmaceutical plants have embraced locally made petrochemical feedstock like phenol and cumene, which is used in producing penicillin, indigenous soft drink plants like Bigi Foods now purchase terephthalic acid and ethylene glycol locally to produce PET plastic bottles for its drinks.
Likewise, manufacturing outfits like Supreme Resources Nigeria Limited, Daraju Industries Nigeria Limited, and De Wave Industries have resorted to local purchases of benzene and toluene, two active ingredients for making detergents.
Also, local pharmaceutical firms have been mopping up cassava harvested in the hinterland, which they then extract its starch to solidify and bond their drugs.
Despite their struggles, leading foreign-linked firms, like their local partners, have also joined the race to source their raw materials internally.
For instance, NBPlc, it was gathered, has intensified its quest to achieve 99% of its raw materials locally. The company had in 2016, announced its intentions to get 99% of its raw materials locally by 2020, a target it failed to accomplish.
Sources told BH that at best, the company had only been able to achieve its target by about 45%, leaving behind 55 percent, which it sources from abroad.
Sources also blamed the brewer’s inability to meet its production target on insecurity in several parts of the country, where its farms and partner farmers are located.
However, NB Plc, our correspondent learned at the weekend, is aiming to overcome these challenges by changing tactics.
One of the changes is the decision to relocate most of its farms and farmers from terrorists and bandits-infested states in the North West, North East, and some North Central states to relatively peaceful states like Kwara, Osun, Ogun, Oyo, and Jigawa.
Some grain farmers in Odo-Oba in Oyo State, while speaking to BH on the development, said NB Plc officials contacted them through their WhatsApp groups, asking them to make available their over 10,000 hectares of farmland in the 2024–2030 planting seasons for the production of sorghum and barley used in the production of beer and malt drinks.
“As we all know, sorghum, the major ingredient in the production of beer, grows better in Savanna regions. Fortunately, it is not only in the North currently plagued by insecurity that we have Savanna vegetation. We also have them in some parts of Oyo State, notably Ogbomosho and Odo Oba areas and Shonga in Kwara State.
Meanwhile, like all good things, the backward intervention drive by local firms has its own downside.
Agricultural experts blamed the current high cost of foodstuffs in the country on the competition for grains and farm produce by people needing it for direct consumption and businesses that require them for production purposes.
“Grains like maize have become very expensive because animal feed firms now send agents to markets to buy them up, leaving little behind for humans to consume.
“That is why the prices of garri from cassava has gone up. Pharmaceutical firms in need of starch are frantically searching and mopping up the product wherever they can find it.
“The good news, however, is that farmers are taking advantage of the huge demand in cassava to cultivate new farms. So, Nigerians should expect surplus harvest in the next one and half years to two years”, said Dr. Toyosi Adeyemi, a crop production expert.