Why 2019 could be tough for consumer goods firms
Consumer goods firms, who are already feeling the pinch of a tough and unpredictable macroeconomic environment, could face further margin contraction next year.
Analysts are of the view that rising interest rates and the expectation of tariff hike on power and fuel by federal government- which would further damp consumer purchasing power as sluggish consumer demand continues-could prevent firms from delivering a higher return on investment to shareholders.
Experts added that while election spending is at best expected to deliver marginal boost to spending, the effect of it would only be confined to the first quarter.
Also, they said effect of the 67 percent proposed minimum wage hike will only trickle down to the pockets of consumers if compliance with the increase spreads across the states and private sector.
They however added that firms may maintain stable margins if they intensify on cost cutting strategy, as some of them are sourcing raw materials locally.
“Profit margins are expected to remain stable at current levels – with downside factors arising from slight increase in interest rates in the coming year,” said Ifedayo Olowoporoku, a consumer goods analyst at Vetiva Capital Management Ltd.
“On balance however, steady inflation levels and raw material costs will support margin stability but not an improvement,” said Olowoporoku.
Christian Orajekwe, equity research analyst at Cordros Capital , is of the view that possible increase in price may not be good from a consumer perspective, adding that interest rates are up and it might balloon the financing costs of firms that have debt in their capital structure.
“Yields on short term security have been going up and interest rates in the OMO rates and commercial papers have also been increasing, Flour Mills and Nigerian Breweries are big players in the commercial paper market,” said Orajekwe.
Yields on Treasury bills (T-bills) are over 17 percent, from between 12 to 14 percent as the start of the year as the central bank continues to mop up liquidity.
Dwindling purchasing power among consumers, insecurity in the northern part of the country, decrepit infrastructure, high incidence of smuggling, counterfeiting locally manufactured products, and the menacing grid lock at the Apapa Ports have made it practically difficult for consumer goods firms to grow profit or bolster margins amid sky high cost of production.
The economy has been growing sluggishly as GDP expansion of 1.80 percent in the third quarter is lower than the 2.10 percent recorded in the fourth quarter of 2017 when the country exited its first recession in 25 years.
The headline inflation rate rose marginally to 11.28% y/y in November, from 11.26 percent in the month of October.
To further exacerbate the already anaemic position of firms, consumers have refused to open their wallets, as Nigerians are getting poorer by the minutes, while unemployment rates are rising amid growing population.
According to a recent World Bank data, 92.10 percent of Nigerians live at below $5.50 a day. The reality is that most people cannot afford to buy a packet of Spaghetti or proteins.