Some major fast-moving consumer goods companies, including Cadbury, Guinness Nigeria and Nestle lost the sum of N472.3bn to naira depreciation during the first nine months of 2023, according to a new report by Meristem.
According to the analysis, the high inflation rate has put significant pressure on consumer products production prices, particularly for food and beverage businesses.
It added that the increased costs of essential raw materials such as grains, dairy, and meat directly impacted production, leading companies to either absorb the expenses or pass them on to consumers through higher prices.
The report read in part, “For the majority of companies in the consumer goods sector, which heavily rely on the importation of raw materials, the weakened Naira translated into significantly higher import bills, thereby leading to a substantial increase in production costs.
“Moreover, companies holding foreign-currency-denominated debts, like Nigerian Breweries Plc, Nestle Nigeria Plc, and Guinness Nigeria Plc, Cadbury Nigeria Plc, faced higher debt burdens, more expensive letters of credit and substantial.
“This placed significant strain on the profitability of these industry players, leading a number of these players to report after-tax losses for both Q2:2023 and Q3:2023.
“As of 9M:2023, foreign exchange losses for major players in the industry stood at NGN472.35bn, further underscoring the magnitude of the challenge posed by the naira’s depreciation on the financial health of consumer goods companies.”
With Nigeria’s inflation reaching its highest levels in over 18 years (28.20 percent YoY as of November 2023), the report said fundamental aspects such as consumer behaviour, purchasing power, and spending patterns felt the impact, leaving an indelible mark on the industry’s overall dynamics.
It added, “Reflecting the broader macroeconomic terrain of the nation, the consumer goods sector has grappled with a host of pervasive challenges.
“These challenges range from foreign exchange shortages and the Naira devaluation, lower purchasing power of consumer due to the unabated inflationary pressures, the rising cost of commodities, amongst others.”
It noted that while positive signs, such as anticipated price hikes and robust sales during the festive season, are set to drive increased revenue, several concerns cast shadows over this outlook.
It also predicted that the ongoing inflation surge, coupled with the naira’s continued depreciation and challenges in foreign exchange liquidity, are expected to weigh on companies’ profitability.
It read further, “Moving forward, into 2024, we anticipate more players in the industry to engage in business restructuring, strategic acquisitions, and expansions to sustain profitability and navigate the challenging operating conditions in the Nigerian market.
“Despite ongoing struggles with rising costs due to inflation and substantial FX losses affecting their bottom line, we foresee consumer goods companies adapting their product categories to remain relevant and innovative, aiming to stay ahead of the curve in serving evolving consumer needs.”
About nine of Nigeria’s top firms lost N960.18bn to the new forex policy in the second quarter of 2023.
According to the half-year financial reports of the firms, the steep devaluation of the naira, following the Central Bank of Nigeria’s attempt to close the gap between the official and parallel rates of the naira, negatively impacted their businesses.
The firms included MTN Nigeria Communications Plc, Airtel Africa Plc, Dangote Cement Plc, Dangote Sugar Refinery Plc, Nestle Nigeria Plc, MRS Oil Nigeria Plc, Guinness Nigeria Plc, Nigerian Breweries Plc, and Seplat Energy Plc.
Speaking on the primary reason behind the losses recorded by the firms, a finance expert at the Pan-Atlantic University, Lagos, Associate Professor Olusegun Vincent, blamed foreign currency-denominated commitments made by the companies.
According to him, for companies to avoid being caught in the whirlwind, conscious efforts must be made to hedge against currency devaluation.
The efforts, he said, might include making investments in foreign currencies and avoiding too many foreign debts.
Vincent said, “When the exchange rate is floated in a country like ours, we are bound to face consequences. The consequences of such will permeate both the government and the corporate bodies. Everybody will suffer from it.
“At the corporate level, many companies are bound to experience loss because there is that exposure when you have some of your debt denominated in foreign currency. Many of our companies have loans and commitments in their books that are denominated in dollars. By accounting standards and accounting practices, the fair value of such transactions has gone up. That is the provision of accounting.