Local input sourcing, mergers seen as options for manufacturers amid recession

When the Nigerian economy slipped into recession in 2016, Nigerian manufacturers adopted two forward-looking strategies: backward integration and mergers and acquisitions (M&AS).

Coca-cola announced a 40

percent equity investment in Chi Limited, makers of Chivita drinks brand, completing the 100 percent acquisition in 2019. BUA Group, one of Nigeria’s foods and infrastructure conglomerates, announced the divestment of its flour business to Olam International in a deal worth $275 million. Vita Foam merged with Vono Products, just as GSK Consumer Nigeria plc later received a non-binding offer from Suntory Beverage & Food Limited to take over the former’s drinks business.

Apart from that, firms such as Unilever, PZ, Flour Mills, among others, started sourcing more of their raw materials locally or expanded their backward integration projects across the country to hedge against foreign exchange crisis hitting the country then.

Fast-forward to 2020, Africa’s largest economy has plunged into a worse recession, with consumer demand and economy hitting rockbottom on the back of COVID-19 and poor economic management. Unemployment has nearly doubled since 2016 (14.2 percent to 27.1 percent) and millions have been plunged into poverty.

Nigeria’s recession is often characterised by high production cost, low consumer demand, dollar scarcity, loss of market foothold and factory closures. In 2016 alone, 54 manufacturing firms shut down in one year due to dollar crunch, according to Frank Jacobs, the then president of the Manufacturers Association of Nigeria (MAN). A number of small-scale businesses have shut down already this year, with medium and large firms struggling to access dollars to import inputs.

“Manufacturers have to contend with higher production cost and bleak revenue outlook on the back of weak economic output,” Mobola Adu, research analyst at GDL Nigeria, said.

“So, the manufacturing sector is expected to witness mergers and acquisitions going forward in order to prevent shutdowns, because the macroeconomic condition is not really favourable for their consumers, thereby affecting the volume of sales,” Adu said.

Analysts see more M&AS in the food, beverages and tobacco sub-sector.

The Nigerian manufacturing sector has 76 sub-sectors with capacity utilisation averaging 56.8 percent 2019. Most manufacturers have told Businessday that they only get 2 percent to 10 percent of their dollar needs as foreign exchange scarcity continues to spread. A crash of the crude oil market since late 2014 has hurt FX inflows into the economy, leading to severe scarcity of the greenback. Analysts urge manufacturers to invest more in backward integration to hedge against FX and closure risks.

“Many manufacturing companies will try to improve their productivity by investing more in backward integration to improve their operations and productivity, especially with foreign exchange challenges in the system,” Akinloye Ayorinde, consumer goods analyst at CSL Stockbrokers, said.

Backward integration occurs when a company buys or merges with its suppliers, or internally produces segments of its inputs. A brewer, for example, can acquire part or whole of its sorghum supplier or sets up subsidiaries producing some of its sorghum, barley or hops.

Fortunately, many manufacturers are expanding their backward integration projects to hedge against FX risks and grow profitability.

From only one state, Oyo, Frieslandcampina WAMCO has moved to four other states – Ogun, Osun, Kwara and Niger – with a view to sourcing local milk from Fulani herders.

The dairy company recently launched into northern Nigeria with a large project in Niger State’s Bobi Grazing Reserve.

“In 2019, we built a new factory and the bulk of fresh milk that is collected is what we use in producing our Peak yoghurt range,” Ben Langat, managing director, Frieslandcampina WAMCO Nigeria, told Businessday in a recent interview.

Frieslandcampina WAMCO, a Dutch dairy maker, has also set up 16 milk collection centres in Oyo State and is constructing 10 new ones for the collection of raw milk from local herdsmen as input.

Also, PZ Wilmar, a subsidiary of PZ Cussons, has 26,500 hectares of palm oil plantations in Cross River State. About 5,549 hectares (ha) of oil palm plantation are located in Calaro Estate, while 2,369 ha are in an area known as Calaro Extension. Its investment in oil palm plantations in Cross River State alone is worth approximately $150 million, Santosh Pillai, managing director of PZ Wilmar, told Businessday.

The firm also acquired Ibiae plantations with 5,595 hectares (ha); Ibad plantations in Akampa with 7,805 ha; Kwa Falls in Akampa Akpabuyo with 2,014 ha, and Oban plantations, also in Akampa, with 2,986 ha.

“We are determined to continue with these investments and looking for opportunities to expand our plantations in the state. We have also invested aroundn 20 billion in an oil palm refinery in Lagos,” Pillai said.

Through its subsidiary, Caraway, Olam started a pilot project in September 2019 on 20 hectares of farmland across three locations in Kano and Jigawa States, which are being expanded to 500 hectares. This is followed by the commencement of a larger outgrowers programme to engage 1,000 farmers to be trained and provided with seeds that will deliver the same kind of output the pilot farms are recording.