…Firms transfer increase to consumers

By Nkiruka Nnorom

In apparent reflection of the high inflationary pressure across the country, the cost of raw materials for consumer goods rose sharply by 40 per cent in 2021, but with little impact on the profitability of producers.

Since 2020, Nigerians have been battling with persistent increase in prices of goods and services, aggravated by insecurity, naira depreciation and supply chain disruption caused by the COVID-19 pandemic.

Data from the Nigeria Bureau of Statistics, NBS, showed that average annual inflation rose to 13.2 per cent in 2020 from 11.39 per cent in 2019, indicating 181 basis points increase.

This trend aggravated in 2021 as average annual inflation rose further by 378 bpts to 16.98 per cent.

The severity of this trend is reflected in the increased cost of producing consumer goods, which are mostly essential commodities used regularly by consumers. These include packaged food, toiletries, beverages, stationery, over-the-counter medicines, cleaning and laundry products, plastic goods, and personal care products.

Financial Vanguard analysis of the financial statement of seven major Fast Moving Consumer Goods Companies, FMCG, listed on the Nigerian Exchange Limited (NGX), including Unilever Nigeria Plc, Nestle Nigeria Plc, Cadbury Nigeria Plc, NASCON Allied Industries Plc, Dangote Sugar Refinery Plc, GlasxoSmithKline (GSK) Plc and May & Baker Plc, showed that the amount spent by the companies on raw material procurements rose to N451.56 billion in 2021 up from N323.33 billion in 2020, indicating a 40 per cent increase.

Consequently, the ratio of raw materials cost to total cost of sales for the seven companies rose to 78.3 per cent in 2021, up from 74.6 per cent in 2020, representing a 3.7 percentage point increase.

Similarly, the companies spent more of their revenue on raw materials in 2021. The companies’ spent 55.9 per cent of their revenue in 2021 on raw materials procurement, up from 49.8 per cent spent in 2020, indicating a 6.1 percentage increase.

The increase in raw material cost led to a jump in the cost of sales of the seven companies by 33 per cent to N576.58 billion in 2021 from N433.31 billion posted in the previous year.
Furthermore, the seven companies recorded an 11.4 per cent increase in selling and distribution expenses, to N65.54 billion in 2021 from N58.82 billion in 2020.

Notwithstanding the huge increase in cost of sales as well as in selling and distribution expenses, the combined profitability of the seven companies remained relatively stable.

The companies recorded Profit Before Tax, PBT, of N105.53 billion in 2021, representing a paltry 0.3 per cent decline from N108.29 billion in 2020.

However, five of the companies recorded an increase in profitability, indicating that much of the increase in raw materials, selling and distribution costs were transferred to consumers of the products.

Breakdown of companies’ financials
Unilever Nigeria Plc recorded 141.41 per cent increase in PBT to N1.88 billion in 2021 from N4.54 billion loss before tax in 2020. This was in spite of 21.1 per cent increase in cost of sales to N50.16 billion from N41.41 billion in 2020, driven by 33.1 per cent and 38.9 per cent increases in raw materials procurement and distribution expenses respectively,
Nestle Nigeria Plc also recorded a two per cent increase in PBT to N61.88 billion in 2021 from N60.64 billion in 2020.

This was in spite of a 31 per cent increase in cost of sales to N219.89 billion in 2021 from N167.87 billion in 2020, driven by 31.2 per cent and 9.8 per cent increase in raw materials cost, and selling and distribution costs respectively.

Furthermore, Cadbury Nigeria Plc recorded a 21.62 per cent increase in its cost of sales, driven by 48.5 per cent increase in the cost of raw materials.

Specifically, its cost of sales went up to N35.89 billion in 2021 from N29.51 billion in 2020, while the cost of raw materials moved to N27.05 billion from N18.21 billion in 2020. The company’s selling and distribution cost also jumped to N5.06 billion from N4.58 billion in the previous year. Yet the company recorded a 169.61 per cent increase in PBT to N1.1 billion in 2021 from N408 million in 2020.

May & Baker Plc, also recorded 16.8 per cent increase in PBT to N1.46 billion in 2021 from N1.25 billion in 2020, defying 28.3 per cent increase in its cost of sales, which rose to N7.2 billion in 2021 from N5.21 billion in 2020. The rise in cost of sales was driven by 36.4 per cent increase in cost of raw materials input to N6.07 billion from N4.45 billion, as well as 24.83 per cent increase in selling and distribution expenses to N1.81 billion from N1.45 billion expended in 2020.

Also recording an increase in profitability was NASCON Allied Industries Plc, with PBT of N4.24 billion in 2021, representing 8.4 per cent increase from N3.91 billion in 2020. This defied the 29.6 per cent increase in its cost of sales to N21.32 billion in 2021 from N16.45 billion in 2020, driven by 33.7 per cent rise in cost of raw materials procurement to N18.01 billion from N13.47 billion, while the selling and distribution expenses rose to N2.8 billion from N2.4 billion in 2020, representing a 16.7 per cent increase.

However, GSK, recorded a marginal decline in profitability, as its PBT fell by 5.4 per cent to N946 million in 2021 from N1 billion in 2020, reflecting the 5.8 per cent increase in the company’s cost of sales which rose to N16.27 billion from N15.38 billion in 2020. Its cost of raw materials procurement also recorded a 6.2 per cent increase to N15.35 billion from N14.46 billion, while selling and distribution cost was a marginal 0.7 per cent increase to N3.54 billion from N3.52 billion.


Dangote Sugar Refinery recorded the highest decline in profitability, which fell by 25.43 per cent to N34.02 billion in 2021 from N45.62 billion in 2020. This sharp decline was driven by a 43.8 per cent increase in cost of sales to N225.85 billion from N157.08 billion in 2020, caused by a 53.5 per cent jump in raw materials cost to N183.37 billion in 2021 from N119.43 billion in 2020. The company’s selling and distribution expenses also rose to N906 million from N677 million in 2020.

Operators chart way forward
Commenting, Victor Chiazor, Head, Research and Investment, FSL Securities Limited, said: “Inflationary pressures on prices of raw materials as well as the gradual depreciation of the naira were all factors that triggered the rise in cost of sale during the financial year. This rise, if not efficiently managed, will continue to eat into the company’s profits as they may not be able to raise the price of goods as fast as the rising cost of sale.”

On the way forward, he stated: “Companies may have to remodel their operations to cater for different segments of the market in a bid to maintain market share and keep revenues high as we expect the rise in both cost of sale and selling and distribution expense to continue into 2022 due to the rise in raw materials, rise in crude oil price, rising inflation and the gradual depreciation of the naira,” he said.

While corroborating this position, Emmanuel Onojoa, Head, Research, GTI Group, speaking, said: “Majorly, the continued devaluation of the naira and FX scarcity continues to exert pressure on the cost of raw materials, most of which are imported to support local supply. Imprints left by the border closure, excise duties and insecurity in food processing regions, have all contributed to surge in price of raw materials, as inputs became hard to get, as well as being sourced at a higher price when available.”

Also commenting, Luis Colaco, Director of SSA Consumers, EFG Hermes and Oyinkansola Fagbulu, Nigeria based analyst for EFG Hermes, said: “There is little to nothing the companies can do to change the big picture drastically in the short-medium term. If we were to suggest that the companies focus on ramping up on local sourcing, we know that they will still remain indirectly exposed to FX.

In some cases, companies like Flour Mills and Dangote Sugar rely majorly on imports for its key materials (wheat and sugar respectively) and the current production of these raw materials locally cannot meet Nigeria’s demand.

“In order to limit the impact, companies are also trying to change the packaging/sizes of their products, so it can make their products more affordable (better entry points for consumers), without affecting the margins per liter/gram. Having said this, to see a big and sustainable improvement in margins, we will need to see a big improvement on the macro front.”

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