Consumer goods sector: out of the woods
Friday, January 21, 2022 / 11:59 AM / by CSL Research / Header image credit: Affy Store
The Food, Beverages and Tobacco sub-segment of the manufacturing segment of the Nigerian economy has continued to hold its own in the manufacturing space despite several macroeconomic headwinds since 2015. Recovering from the 3.0% decline recorded in Q2 2020 , the segment recovered to post an average growth of 5.2% between the third quarter of 2020 and the third quarter of 2021. We attribute this to improving economic conditions, amid an easing of the strict economic lockdown that has permeated the market in early 2020. The segment continued to outperform Gross Domestic Product (GDP) over the period, proving its continued relevance in a struggling economy.
In 2021, consumers faced high prices despite the continued decline in headline inflation, which in November had fallen to 15.4% year-on-year. This resulted in an erosion of purchasing power. Since 2012, the Nigerian consumer has been under severe pressure. From partial fuel subsidy cuts to the free fall of the naira in recent years, to the footprints left by border closures and insecurity in food processing regions, all have contributed to inflationary pressures. In response, the average Nigerian consumer has downsized the value chain, turning to cheaper alternatives as the cost of living rises in the face of generally low income levels.
The performance of our hedging universe was mixed in 2021, with some recording gains while others signaled price declines. The significant rise in the price of honey flour was due to corporate action on the symbol as Flourmills completed its plans to acquire the business in a deal that pushed the price of the symbol to its book value. For context, whenever such an acquisition is about to take place, it is common to consider the company’s net book value per issued share capital as the cost base of the acquisition. Guinness, Flourmills, Unilever and Nestlé have benefited from improved performance, hence price increases in 2021. Conversely, DangSugar, Cadbury, Nigerian Breweries and International breweries have recorded negative performance since the start of the year.
We expect players in the food processing segment to have a good year in 2022. We base this expectation on the recent turnaround in the performance of players in the segment, leaving them with decent growths in volume, revenue and in turnover. Our expectation for the segment is based in particular on the essential nature of the goods produced, and the reduced level of imported substitutes despite the reopening of borders in 2021.
The concern for brewers remains their inability to drive the required volume. The three main space players do not report a sufficient contribution to fixed costs. This we attribute to the myriad of cost issues that companies could not manage due to the discretionary nature of their products. As the easing of lockdown measures continues and consumer capacities improve, FMCGs have started to show decent performance. The elephant in the room, however, remains the concern over the exchange rate and its impact on the cost structure of players in the segment. Given that players have shown resilience over the past year, we are optimistic that the segment’s performance will improve in 2022.
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