Murphy: There is Increasing Optimism about the Nigeria Economy
The Chief Executive Officer of Mouka, Ray Murphy, x-rays the current state of Nigeria’s economy, expressing hope that the country is coming out of the woods. He also spoke on the business strategy his company adopted to remain afloat at the peak of the re
The economic recession has adversely affected the activities of most manufacturers; to what extent, would you say the recession impacted on your bottom line?
Obviously 2016 was an extraordinarily challenging year but I think after 20 years of consistent average of 3, 4, 5 per cent GDP growth in Nigeria, I think it is the first time in 20 years that we went negative and the country actually went into a recession. How did that impact on Mouka? I would like to think that we bucked the trend a little bit, as the country went into recession that was the time when Mouka was actually reinvesting in our business.
I can explain what I mean by reinvestment. Throughout 2016, we very much took the view that we had to focus on three key areas. First of all was the Nigerian consumer, when the Nigerian consumer was being seriously affected by the recession and disposable income had decreased throughout 2016, many companies cut their marketing budget back to the core and stopped communicating with consumers. We did the reverse; we significantly increased our market spending and actually started communicating even more with our loyal and new Mouka consumers. And that was one of three reasons why I think we buck the trend in 2016. Secondly, we also revisited the quality of our product. When you go into recession many companies cut pack sizes and cut the formulations of the product. Now, we went the other way and we can clearly demonstrate that we have consistently improved the quality of our product over the past 18 months. So, first of all, communicating with the consumer, and then secondly giving an absolute cast time guarantee of quality, not cutting corners, not cutting pack sizes.
Third point was how do we reach our loyal consumer base? Now we partner with around 250 loyal distributors in Nigeria. So again we laid down a serious plan with them, a series of support plans with them which actually strengthens their business. And throughout 2016, basically we fulfilled our promises. We measured the beginning of the year basically what our distributors thought of us and we measured the end of the year what they thought of us and we were able to detect a very distinct improvement in our customer service measures.
Basically we said Mouka is fulfilling its promises, is doing what it says it would do. And then I think probably the fourth and probably most important area is the Mouka people. You know, one cannot have a successful people business without a strong loyal workforce. And I think obviously collectively the Mouka people made a big, big, difference in 2016. Many companies were retrenching, cutting back on production, laying off employees etcetera. Throughout 2016 we didn’t lay off anyone, if anything, our head count actually increased and we also increased our training budget fourfold throughout 2016. So I would say that what while many companies were negatively impacted by the very serious conditions in 2016, we actually saw it as an opportunity to continue investing in the four key areas I have just mentioned. And it was through continued investment that I think we reaped the reward in 2016.
Are you saying it did not affect your margins?
Our margins remained at the levels at which we expected.
The major thing that characterised the recession was forex scarcity and that was the major problem most manufacturers had, are you saying you were not affected by the issue of forex?
We were affected, yes, but we developed tactics and strategies to help us manage the forex situation. You know 2016 was very much a game of two halves, pre-June 2016; the exchange rate to the dollar was N200 to the dollar. Third week of June there was an adjustment in the exchange rate and how the mechanics through which one procured forex changed, first half to second half. So we had strategies in place for the first half of the year which we had to adapt and be very agile and change those for the second half of the year. So yes we did face forex challenges but again as a company we were very, very agile and trying to overcome those forex challenges. For example, on the second half of the year there were some of the financial derivatives available to companies in terms of forwards and futures. And some of these were very relatively new products to the average Nigerian treasury manager but we got ahead of the game quite quickly. And again that is a major attribute, going back to the Mouka people, our finance department, our treasury department, we are quick minded and very, very agile and this helped us to some degree to mitigate the forex scarcity challenges. It was an issue but we were ahead of the game and because of that we successfully addressed those challenges.
Some companies became innovative because of the recession, what segment of your business didn’t go down on demand through the demand and supply principles? What do you import? Did you continue to import or you began to look for local substitutes?
In terms of the polyester, which is the core of our mattress, I wish we could have been able to procure two key chemicals, which are used in the manufacture of mattress, locally. They are petrol derivatives and they have to be procured internationally. But almost all of our other raw materials from textile to packaging and a number of other raw materials are all locally procured and we will continue to do with that local strategy. In value terms we procure about 40 percent of raw materials overseas; because the majority of my cost is related to import oil derivative chemicals.
It was important that we have a strong strategy in place to mitigate the impact of forex. Going back to your first question, in terms of quality, it is non-negotiable in terms of compromising on quality. We know what others have done in terms of downsizing product or playing around the formulation to cut cost, and therefore certain products won’t last as long as it should last. We will not compromise our relationship with our loyal consumers by giving them a cut down quality or substandard product. That is a short term measure that will lead to a short tern result, which will have serious implications in the long term. So it is non-negotiable in terms of compromising quality.
How do you manage the issue of electricity?
In terms of power, we have got the office here and three manufacturing facilitates and all four of those areas have primary and backup generators. So we are not dependent on the main grid. Obviously the main grid in terms of cost is cheaper than running your own generators. But we have built an infrastructure, we have built our product cost based upon self-generation of power and anything that we get through the main grid is actually a benefit but we are not dependent upon it.
Government is about expanding Export Expansion Grant (EEG), what is your view on this?
First of all we don’t have any plans to directly export at this stage. We all know that the product that we produce are mattress, a big bulky product and the freight cost of transporting that over land makes it prohibitively expensive to export. However, while at the moment 100 percent of our revenue is in naira from Nigeria, we do have aspirations to extend our foot print in West Africa and beyond, but I think that would come less through export and more through looking at opportunities to setup in other countries or even merge with companies in other countries. I think that would be the strategy for extending our footprint.
The government has said that we are likely to exit recession by end of June; do you see signs of exiting the recession?
Interestingly we met on this very subject yesterday with some of the banks. I think over the last couple of months everyone can see an increasing level of optimism. I think everyone is of the general view that things are bottomed out and there are the green shoots of recovery in the air. We can see in terms of what the government and central bank have done in recent month and even this last weekend in terms of the new forex window that things are looking a lot more optimistic for the second half of 2017. And that is very much our view, we are optimistic, and we are looking forward to second half of the year being much stronger than the first half of the year. And then sustainability and beyond, because as a manufacturer I think the challenge is volatility and this list of stability, we can plan and you know volatility makes planning very, very difficult. That is volatility in terms of exchange rate, inflation and GDP growth. When you have volatility it makes planning difficult. When you have some stability then you know one can plan much better and execute much better.
What are the indices you think that indicate that Nigeria’s economy will grow stronger in the second half of the year?
I think the indices that would indicate it strength include the fact that inflation is no more sitting at17 percent, but declining; I think that would decline quit rapidly in terms of inflation. We have seen a spike in the past year. So as inflation comes down it increasingly becomes more of good news in the economy. If I picked up the papers almost every day last year, it was pessimism and bad news; now we are getting much more optimism and good news and that flips through to the consumer, and that gives the consumer a lot more confidence. We saw a lot of spike and increase in unemployment in 2016 that hits consumer confidence. They would of course think, “I cannot go on and spend today because I