Manufacturers of fast-moving consumer goods (FMCG) are grappling with a surge in unsold inventory in their warehouses, a trend likely to result in a significant decline in output levels within the sector.
This increase in unsold goods is primarily driven by the rising cost of living and declining purchasing power among citizens. According to Financial Vanguard, due to the downturn in consumers’ disposable income, the stock of unsold goods for FMCG manufacturers rose by 27 percent year-on-year (YoY) for the financial year ending December 31, 2023.
The sector anticipates a worsening situation in 2024, with a projected over 30 percent rise in unsold goods in the first quarter alone.
Consequently, output levels have been steadily declining since mid-last year.
A report from the Central Bank of Nigeria (CBN) indicated that capacity utilization in the food and beverages sector dropped to 49 percent from 61 percent in the same period in 2022, marking a 20 percentage point decline.
Nigerians have been facing inflationary pressures that have significantly reduced consumers’ purchasing power over the past eighteen months.
The headline inflation rate increased from 21.34 percent in December 2022 to 28.82 percent in December 2023, driven by factors such as high energy costs and insecurity, particularly in farming communities.
During the same period, food inflation surged from 23.75 percent to 33.93 percent. This trend has continued in 2024, with headline and food inflation rates rising to 33.69 percent and 40.53 percent respectively by April, up from 29.90 percent and 35.41 percent at the start of the year.
The massive increase in inflation, coupled with naira devaluation, has led manufacturers to raise prices to cover high input costs.
However, this measure has alienated many consumers, thereby slowing down sales. Financial Vanguard’s findings from the operations of 15 major FMCG companies reveal an escalating stock of unsold goods worth N104.45 billion, despite significant production cuts.
These companies include BUA Foods Plc, Dangote Sugar Refinery Plc, Nestle Nigeria Plc, Presco Plc, Cadbury Nigeria Plc, Okomu Oil Nigeria Plc, NASCON Allied Industries Plc, May & Baker Nigeria Plc, Fidson Healthcare Plc, Neimeth Pharmaceuticals Plc, Guinness Nigeria Plc, Champion Breweries Plc, Flour Mills of Nigeria Plc, Nigerian Breweries Plc, and Honeywell Flour Mills Plc.
A detailed breakdown shows that while some companies reduced their stock of unsold goods, palm oil producers like Okomu Oil Palm Plc and Presco Plc suffered the most significant impacts. Presco, the leading palm oil producer, saw its inventory of unsold goods rise by 249.4 percent to N1.45 billion. May & Baker Plc and Okomu Oil Palm also experienced substantial increases of 160.2 percent and 124 percent, respectively.
Other companies with notable increases include Dangote Sugar Refinery Plc, Flour Mills of Nigeria Plc, and Cadbury Nigeria Plc, with stockpile increases of 92.9 percent to N9.76 billion, 74.1 percent to N30.75 billion, and 71.5 percent to N3.55 billion, respectively.
Interestingly, all brewers reported a reduction in their unsold goods. Responding to the findings, Sola Obadimu, Director General of the Nigerian Association of Chamber of Commerce, Industry, Mines, and Agriculture (NACCIMA), remarked that these results are not surprising and warned that the situation may persist until economic conditions stabilize.
His words: “As I always say, we’re in a ‘stagflation’ situation, meaning – persistent rising inflation and high unemployment rates in a static wage situation. The wages are not just static, they’re declining in value in real terms as a result of inflation. Consumers (and industries as well) are also vulnerable/defenceless victims of rising energy costs, unstable forex rates and debilitating infrastructure generally, etc. So, it’s no surprise that inventories are growing.
“We’re all aware of the fact that some major multinationals declared losses for 2023 as a result of the unfavourable economic climate and some chose to leave while others are contemplating. It’s easier for local industries and businesses whose owners can quickly take decisions in the face of constantly changing critical economic indices. These multinationals sometimes have to seek aporovals for some major situations from their global Head Offices which may take a while to come due to lack of adequate understanding of the local environment.
“So, unless we get some sort of stability in critical economic indices and consumer purchasing power increases in value terms, the story may not agreeably be too different in 2024.”
Muda Yusuf, Director General of the Center for the Promotion of Public Enterprise (CCPE), attributed the growing inventory of unsold goods to the depreciation of the naira and high energy costs, among other factors. He noted that consumers are now reconsidering their preferences and opting for cheaper alternatives when available.
Yusuf emphasized the necessity of lowering the exchange rate and energy costs to reduce companies’ production expenses.
He said: “The high level of inventory of finished goods, particularly the unsold inventory, are the consequences of high production cost and the high operating cost that the manufacturers in the FMCG sector have been grappling with over the last one to two years.
“There have been challenges of escalation of cost arising from exchange rate depreciation, high energy cost, high cost of logistics and challenges around the high cost of funds.
“These are the key issues and, naturally, when the production and operating costs increase, the natural thing is for the increase in cost to be passed on to the consumers in the form of high prices.
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“So, what we are seeing is that the prices of some of these products have gone up significantly and some by as high as 50% and in some cases, even 100% in the last year.
“And in an environment where the purchasing power is also weak, where the level of poverty is also high, naturally, these inventories will be very slow in terms of outflow from the warehouses because of the weak purchasing power of the consumers.
“There’s also an element of consumer resistance due to this high cost of production. There is also an element of substitution. For some of those products that have substitutes, consumers may decide to go for cheaper substitutes because of the high prices.
“So, basically, these are the factors that are responsible for the high level of inventory of finished goods that we have seen in recent times.”
On his way out, Yusuf emphasized the necessity of implementing strategies to reduce operating and logistics costs while enhancing citizens’ purchasing power.
He highlighted the importance of stabilizing and increasing supply in the foreign exchange (FX) market to curb currency depreciation. According to Yusuf, achieving this will lead to lower operating and production costs.
“Once the currency strengthens, the cost of production will, naturally, be less; the cost of logistics, if the energy crisis goes down, will also begin to decelerate.
“Then, of course, there’s also the element of the cost of clearance of cargo.
“These cargoes could be raw materials, it could be intermediate products, and it could be machinery that is used by any of these manufacturers.
“The current methodology of determining the exchange rate for the computation of import duty has made the cost of cargo clearance very prohibitive.
“So, if the government through the fiscal and monetary authorities could do an adjustment to this by fixing the exchange rate for the computation of import duty to between N800 – N1,000/$ and this is fixed for may be three months, that will also help to bring down some of this cost and make the products a lot more affordable because the key issue here is the affordability of these products.
The more affordable they are, the lesser the level of unsold goods,” Yusuf added.
According to him, “The danger in the level of this unsold inventory is that some of these products have expiry dates, which is another risk to these businesses.
It is a good thing that the government is talking about minimum wage. If the workers are empowered, we are likely to see an improvement in demand for some of these products.
“So, there’s a supply side issue to bring down the costs of production, operation and logistics and cost of funds.
“There’s also the demand side issue of empowering the consumer to have the purchasing power to buy these products.” Goods
(VANGUARD)
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