Nestle’ cutting their workers is signalling bigger problems as lower spending, foreign exchange risk and security challenges continues hold back growth of Fast Moving Consumable Goods (FMCG) firms in Africa’s largest economy.
Swiss food and drinks company Nestle is cutting 15 percent of its workforce in 21 African countries as it said it overestimated the continents rising middle class.
It means multinationals and investors are no longer bullish on the future of Africa’s consumer goods sector with its huge population, and rising middle class that crave for consumption.
This validates the uphill and arduous times facing consumer goods firms in Nigeria as the cumulative net income of 8 firms tracked by Nairametrics showed net income fell by 61.01 percent to N16.94 billion in the first quarter of 2015, from N27.44 billion the previous year.
Cumulative sales increased by 1 percent to N301.20 billion.
These firms had growth crimped by constrained consumer spending stoked by rising prices in the past few months, crippling fuel shortages that soared transportation costs and the menacing security challenges that disrupts production in the north part of the country.
“Some economists have put a figure to it, that as a country, within the past few weeks we may have lost as much a $1 billion in terms of what would have been spent but they couldn’t, because transportation costs were a lot higher. Everything went up five times the price,” said Dolapo Oni, Head Ecobank Energy Research.
Inflation in Nigeria, where the World Bank estimates almost 30 percent of the population lives in poverty, accelerated to 9.0 percent in May from 8.7 percent a month earlier, data from the nation’s statistics bureau show.
The militant group Boko Haram has carried out gun and bomb attacks that killed thousands since 2009 in the mainly Muslim north and the capital, Abuja, to establish Islamic rule.
The devaluation of Nigeria’s currency, the naira, as a result of the decline in oil price, has left firms vulnerable to exchange risk as they rely mainly on imported raw materials to meet production.
“We imagine that most of these firms will struggle to survive daunting pressure on costs, occasioned by the naira volatility and the pass-through impact of naira depreciation,” confirmed Saheed Bashir an analyst at Meristem Securities Ltd, in a response to questions.
“Brewers and flour millers in Africa’s largest economy import more than 50 percent of their raw materials and other inputs. Even other household and personal product firms such as Nestle, PZ, Unilever and Cadbury which had diversified and gone into sourcing local raw materials, are not exempted from the impact of the falling naira,” Bashir said.
Nigeria central bank scrapped its bi-weekly currency auctions in February 2015 and said it would sell dollars only at the interbank near N198, a move that amounts to a de facto devaluation of Nigeria’s currency.
The naira has lost more than 13 percent of its value against the dollar in the past six months, and was trading 0.2 percent stronger at 199 a dollar by 3:47 p.m. in Lagos.
Fig 1: FMCG firms Q1 2015 performance index
- Nestle Nigeria’s first-quarter net income fell about 58.83 percent from a year earlier, the company said on its website.
- Cadbury Nigeria was dealt the great blow as it recorded a loss in the first quarter the company said on the website of the NSE.
- Unilever Nigeria’s first-quarter earnings slid 21.30 percent, data compiled by Nairametrics show.
- Guinness Nigeria’s nine months profit through March declined 12.28 percent, according to a statement distributed by the Nigerian bourse.
- Nigeria Breweries net income remained flattish at N10.10 billion.
Investors have sold stock in the consumer goods sector as they await clarity on future earnings. Nestlé’s one year return on the NSE dropped -16.54 percent, while Cadbury, Guinness and Nigeria Breweries dipped -53.37 percent, -6.73 percent and -7.41 percent respectively.
Fig 2: Nestle 1 year stock chart