Fast-moving target: Manufacturers are looking to take advantage of new growth opportunities

A booming population offers huge potential for manufacturers of consumer goods, particularly as Nigeria’s nascent middle class further establishes its foothold, but persistent poverty and unemployment mean that price sensitivity is still a major issue. As a result, segments geared toward the lower end of the market offer more predictable returns, and investment in Nigeria’s fast-moving consumer goods (FMCG) sector is growing. However, the operating environment for manufacturers in Nigeria is difficult, with high input costs and other expensive challenges to overcome, such as poor electricity and distribution, but FMCG firms are investing in the future, Christos Giannopoulos, CEO of PZ Cussons Nigeria, told OBG. “Penetration levels are still far behind. Granted there is a poverty line, but everyone eats and drinks and needs soap,” Giannopoulos said.

Global brands are acquiring local companies to penetrate the market, with Olam and Tiger brands both recently taking stakes in Nigerian flourmills. Indeed, a number of multinationals including Nestlé, Proctor and Gamble, PZ Cussons and SANYO, have been building new factories, investing time and money in the future of Nigeria’s FMCG sector.

CONSUMER BASE: Much has been written about Nigeria’s consumer potential, with the emphasis on the nation’s growing population and rising GDP per capita. Numbers on the size and spending power of the middle class are difficult to find. A 2011 report from the African Development Bank defined a person as middle class if they were earning an annual income of $ 6000-at around 37m people. The same year, Russian investment firm Renaissance Capital conducted a survey of middle class Nigerians with an income between $500 and $600 a month, and found that almost 50% planned to buy refrigerators, freezers and other white goods in the near future. With the country’s population projected to grow to 237m by 2025, Nigeria represents the continent’s largest base of potential consumers. However, the rise of a huge population with the disposable income to buy TVs, refrigerators and cars is far from guaranteed. Nigerians defined as middle class have much lower purchasing power than their American or European counterparts. The African Development Bank notes that many in the middle class, which includes those living on $2-$4 a day, could easily slip back into poverty. In Lagos, 93% of residents earn less than $390 a month, according to a 2011 Standard Bank report, which defines this segment as the “bottom of the pyramid”. Firms that can reach the majority of Nigerian consumers are producers targeting price-sensitive and inelastic segments, like food, beverages and personal care products, Standard Bank’s head of equity product, Matthew Pearson, told Reuters in April 2013.

BIGGER PICTURE: Nigeria’s FMCG industry is certainly not immune to the operating challenges facing industry at large, which include power shortages, lack of infrastructure and issues at the ports. Manufacturers have reported falling profits in recent quarters. Even as Guinness Nigeria saw revenues rise 3% to N94.9bn ($597.9m) in June 2012-March 2013, compared to the same period a year earlier, the cost of sales increased 7% to N48.2bn ($303.7m), resulting in a drop in net income to N7.6bn ($47.9m) from 9.3bn ($58.6m).

In the second quarter of 2013, Unilever Nigeria saw profits fall 4% even as revenue rose 10.2%. UAC Foods, a joint venture between Tiger Brands and UAC of Nigeria, a diversified company with manufacturing operations, reported that while profits rose in 2012, costs of sale increased by 16% year-on-year. The high price of raw materials is one concern common to FMCG manufacturers that generally operate with tight margins. With the vast majority of inputs imported, costs are inflated by tariffs and transportation costs.

GROWTH AREAS: However, despite these challenges, the food, beverage and tobacco sector grew 60% between 2007 and 2011 to reach N230.7bn ($1.5bn) in 2012. Coca-Cola Hellenic, the owner of the Nigerian Bottling Company, reported a double-digit increase in volumes in Nigeria in the first three months of 2013, a tough quarter for global growth. At a staff event in May 2013, Olam’s Nigeria country head, Mukul Mathur, acknowledged that it was a difficult global economy for the agricultural processing industry, but said business in Nigeria fared better than average. “These are competitive times for the goods processing and supply chain management industry. Across the globe it has not been great news for most economies, although Nigeria has fared better,” he told staff, announcing that the firm would be expanding into palm oil and fertiliser production to build market share.

PRODUCT PROTECTION: Producers are helped in part by a tariff regime that favours local production. The government currently bans or taxes the import of 26 FMCG items, including spaghetti and noodles, cocoa butter, fruit juice, soaps and detergents, plastics and sanitary wares. According to a number of manufacturers and retailers interviewed by OBG, the number and types of banned products changes frequently.

Furthermore, the nature of FMCG – high volume, high turnover, and often just-in-time distribution techniques – encourages local production. In addition, the rise of a formal retail sector in Nigeria, including modern supermarkets and shopping malls, is providing manufacturers with an increasingly stable and sustainable platform to market a wider array of products. This marks a change from previous patterns. Traditionally, FMCG manufacturers sold directly to Nigeria’s distributors and the products were purchased from informal markets. This has affected the range of products multinational brands put on offer locally, and many are now looking to revise their market strategies. Unilever, for instance, has 600-700 distinct products available globally, but only a small fraction of these are available in Nigeria, according to Haresh Keswani, managing director of Artee Industries and local partner of European retailer SPAR, which is working with FMCG manufacturers to test new products in the Nigerian market.

INVESTMENT: International firms are increasing their direct investment in the Nigerian FMCG industry. On the food and beverage front, Nestlé, which invested $524m in Nigeria over the last 10 years, is now building a third plant in the country. The world’s largest food producer by revenue announced plans in June 2013 to build a new warehouse centre capable of handling 17,000 pallets, to improve distribution and increase the projected capacity of local production.

Olam recently acquired stakes in Nigeria’s Crown Flour Mill and De Rica tomato paste, and plans to commission a new cashew processing plant in Ilorin in 2013. Moreover, in a joint venture with Japan’s Sanyo Food, Olam is planning to manufacture instant noodles in Nigeria for distribution across sub-Saharan Africa. Nigeria has long been home to international breweries, and is already the world’s largest market for Guinness stout by net revenue, Guinness Nigeria’s CEO Seni Adetu told Bloomberg. Guinness Nigeria has nearly completed a $352m expansion programme at its breweries in Ogba in Rivers State and neighbouring Benin.

Recent efforts to boost Nigerian agribusiness have the potential to improve the bottom line. The government is promoting agro-processing, but significantly, Nigerian manufacturers themselves are investing in agriculture to improve their supply chain. Unilever, for example, plans to establish a plant to process Nigeria’s plentiful cassava roots into sorbitol, an ingredient in the toothpaste produced locally. At the moment, Unilever imports sorbitol from China. The scarcity and price of palm oil, a key input in soaps and processed food, has triggered investment in local development of oil palm plantations. “Palm oil is going to be huge,” PZ Cussons’ Giannopoulos told OBG.

PALM OIL: Nigeria was the largest exporter of palm oil in the 1950s and accounted for 40% of global production, with producers from as far away as Malaysia and Indonesia sending staff to learn the techniques.

By the end of the 20th century, however, Nigeria was a net importer, producing only 7% of global output, and Malaysia and Indonesia had leapt to the top of the charts in terms of total production. In June of 2010, PZ Cussons launched a joint venture with Singaporean agribusiness firm Wilmar International to cultivate and refine 300,000 tonnes of palm oil annually.

Wilmar is bringing new technology and new trees to improve productivity. It will take five years before the company’s 2m trees are ready to produce, but at that point, PZ Cussons will be able to reduce its imports from 80% of inputs to just 45%, Giannopoulos said.

ONGOING CHALLENGES: While long-term investment grows, Nigeria’s FMCG producers have faced a year of short-term sales challenges. The combination of floods in 2012, increased violence in the north of the country and the removal of a fuel subsidy has undeniably impacted consumer spending in recent months. Indeed, food prices were up 10% in April 2013 compared with a year earlier, according to the National Bureau of Statistics. Yet the domestic FMCG industry has avoided the level of negative impact seen in other industries, and it has an increasingly bright future. “Medium- to long-term, you’d be writing off the Nigerian economy at your own risk,” Guinness’s Adetu told Bloomberg.