By G9ija

Over the years, strong demographics, the rising middle income class and steady economic growth has positioned Nigeria as an attractive investment destination for Fast Moving Consumer Goods (FMCG) players globally.

However, sluggish economic recovery, tight consumer spending and widening income inequality have slowed the growth in the consumer goods sector since the 2016 recession.

This is apparent given that average GDP growth has slowed to 1.7 per cent post-recession compared with the 4.8 per cent recorded pre-recession. Similarly, the harsh operating environment given poor infrastructure, rising inflation, trade and FX restrictions, porous land borders and logistical setbacks have also dampened the performance of industry players.

Some of the recent developments within the industry include the land border closure, which was primarily aimed at curbing smuggling activities. This led to a reduction in export sales for some companies while providing opportunities for others to marginally increase local market share. Likewise, the border closure increased local prices of goods and raw materials.

Also, the consumer goods sector is among the hardest hit by the economic crisis brought about by the COVID-19 pandemic. The fragility of household wallets has been laid bare, with statistics now pointing to even weaker consumer sentiments. Also, the knock-on effect of fading demand and weaker oil prices were responsible for the stifling earnings of consumer goods companies in 2019.

Despite gains recorded for the fourth successive week, the NSE consumer goods index still stands at -28.77 per cent. According to the July 2020 Consumer Price Index (CPI) report released by the National Bureau of Statistics (NBS), there was sustained pressure on consumer prices as inflation rose to 12.8 per cent year-on-year (y/y) in July 2020 from 12.6 per cent y/y in June 2020.

It is not suprising that the 2019 full year (FY) and first quarter (Q1) 2020 earnings from the consumer goods companies on the domestic bourse has been quite poor.

Furthermore, a recent survey conducted by REACH Technologies, a Nigeria-based fintech, on behalf of FBNQuest, corroborates findings from the NBS COVID-19 impact survey that the consumer companies have also entered an exceptionally tough phase and is in need of an alteration.

According to them, these companies have found it difficult to access foreign exchange (FX) at higher interbank rates and to obtain raw materials following the crude price collapse in March 2020, remains a challenge.

“The companies are only able to obtain dollars at rates of around N360-390/US$ relative to N330-360/US$ pre-oil collapse. That aside, given that consumer wallets are under pressure, passing on price increases to combat heightened competition comes at a great cost”, they said.

Responding to the survey, Head, Research at FSL Securities, Victor Chiazor, said, the consumer goods sector has been under water for a while now and added that most of the companies listed in that sector have not recovered from the FX crisis that was suffered in 2015 when the Naira was significantly devalued.

Speaking further, Chiazor said the FX situation has impacted their earnings over the years as their cost of production has gone up and that the companies have not been able to pass this increase to the final consumers given the weak disposable income on the consumer space.

He said: “Their margins have continued to shrink over the years and the rise in competition from other cheaper substitute products continue to weaken their market share. All these have forced investors to continue to sell down on their holding and price these companies, even lower as return on equity has continued to weaken over the years.

I agree with other market operators that the market is in need of repositioning to improve output but most importantly is the broader economy because until the economy begins to grow and we see income level rise across the board, leading to increased consumption, the sectors’ performance may remain weak”.

The Managing Director of APT Securities, Mallam Kurfi Garba, believes that the performance of the consumer goods index is down to poor performance of some of the big stocks in the consumer goods category.

He also noted that foreign investors had fled due to the devaluation of the Naira and rushed to sell their stocks leading to fall in the share price of some highly capitalised stocks in the sector.

For their part, Afrinvest said, “Looking ahead, we expect the impact of COVID-19 to soften from H2:2020 although consumer spending recovery would remain slow post-COVID-19. We also expect to see a shift in consumer trends to center around digital engagement, healthy living and price sensitivity. We note that demand would be tilted towards basic food items, majorly mass products while premium brands would struggle in terms of volumes”.