Consumer Firms’ Gross Margins Bouncing Back After Recession Lows

By Nse Anthony-Uko
ABUJA, (Sundiata Post) – Nigerian consumer good firms are beginning to see margin expansion following the worst recession in 25 years which saw their sales fall and costs spike.
Gross margins a measure of profitability, is a company’s total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage.
The higher the percentage, the more the company retains on each naira of sales, to service its other costs and debt obligations.
Margins are rising for consumer firms as they are increasingly able to source foreign exchange (FX) at favourable rates, while also growing sales.
“Those that provide essential goods like basic foods are able to pass on the higher cost to consumers while those that produce goods that are discretionary were unable to pass on increased costs to consumers,” said Johnson Chukwu, managing director and chief executive officer of Cowry Asset Management Limited by telephone.
“Also, some of them benefitted from reduction in raw material price at the international market while landing costs of their raw materials have dropped,” said Chukwu.
Five of the seven largest listed consumer firms were able to pass on higher cost to consumers in the third quarter as margins rose.
The firms are Dangote Sugar, Nestle, Unilever, Cadbury and Nascon Allied Industries.
The cumulative average gross margins of the five firms increased to 27.43 percent in the third quarter (Q3), 2017 financial period from 23.89 percent the previous year (2016), according to data compiled by BusinessDay.
Drilling down into the figures shows Dangote Sugar had the biggest jump in gross margins as it increased to 25.44 percent in September 2017 from 16.48 percent the previous year.
Unilever Plc’s gross margins moved to 10.88 percent in September 2017 as against 8.71 percent as at September 2016, while Cadbury’s gross margin increased to 23.05 percent in September 2017 from 21 percent the previous year.
Nascon Allied Industries Plc’s gross margins rose to 36.82 percent in the period under review as against 33.32 percent as at September 2016, while Nestle Nigeria’s gross margins increased to 40.96 percent in 2017 from 40.10 percent the previous year.
On the flip side, the combined average gross margins of two firms (Flour Mills and PZ Cussons’) dipped to 21.50 percent in September 2017 from 24.37 percent as at September 2016.
Flour Mills’ gross margins fell to 11.89 percent while PZ Cussons’ gross margins reduced to 31.70 percent in the period under review from 34.51 percent as at September 2016.
Bismarck Rewane the CEO of economic consulting firm Financial Derivatives Company says flour millers are facing consumer resistance against price.
“A price war between some millers is forcing price down from N10, 000 to N9, 500. International price of wheat is down 6.63 percent to $418.5 per bushel,” Rewane said.
Nigeria’s real GDP growth slumped by 2.06 percent year on year (y/y) in the second quarter of 2016, the worst showing during the 5 quarter recession. The economy managed to rebound in Q2 2017, as it registered a +0.5 percent GDP growth rate.
Household consumption expenditure slumped 5.7 percent in 2016, according to latest data released by the National Bureau of Statistics (NBS).
Household Final Consumption Expenditure consists of expenditure, including imputed expenditure, incurred by resident households on individual consumption goods and services.
Analysts at Cardinal Stone research say they expect the impact of lower production costs on the back of sustained FX stability, higher crude oil price and favourable raw sugar prices due to favourable improved harvest in Brazil and India to underpin Dangote Sugar’s future earnings.
Nigerian sugar consumption is estimated at 8kg/capita. This pales in comparison with African peers South Africa (46kg/capita) and Ghana (16kg/capita) respectively, according to USAID.
Consumer goods firms now have access to dollars to import raw materials and equipment since the introduction of the Investors’ and Exporters’ window by the central bank.
Experts are of the view that the margin expansion could translate to higher profit by year end as these firms continue to enjoy increased sales on the back of price increase across key products and their ability to push their goods across the borders.
BusinessDay analysis shows that the cumulative total net income for the 7 fast moving consumer goods (FMCG) firms surged by 294.11 percent to N67.50 billion, while cumulative sales for the seven firms increased by 35 percent to N810.97 billion in September 2017 from N600.76 billion the previous year.
“Nestle and its peers have intensified their export strategy to partly offset the impact of naira depreciation on their cost of imported raw materials,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham Limited.

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