Consumer Goods firms’ earnings slide amid weak economy

The largest Nigerian consumer companies’ generated earnings well below the levels of the past 4 years as a slow growing economy leaves them grasping for breath.

The industry is the hardest hit from high costs of imported raw materials, decrepit infrastructure, and a pressured consumer wallets, the three monsters undermining their profitability.

The cumulative net income of a the ten largest consumer stocks that have released half year 2019 results hit N582.83 billion, a 19.25 percent drop from the N721.83 billion recorded in the corresponding period of 2018.

That compares with 3.90 percent

decrease in the period 2018-17 and a 127.43 percent surge in net income in 2017-16 period, when the introduction of a new foreign exchange regime by the central bank and a hike in prices of key products helped underpin margins.

The woes of companies started when they could no longer pass on the high input cost to already beleaguered consumers.

An increase in fuel prices and high inflationary environment dealt a blow on consumer wallets, leaving Nigerians impoverished.

Post-recession, growth in real household consumption peaked at 3 percent in the final quarter of 2017, before falling to 1 percent in the second quarter of (Q2) 2018.

Nigerians are getting poorer as over 50 percent of a population of 200 million live on less than $1.98 dollars a day, as the country overtook India to become the world’s poverty capital.

The road to higher margins and profitability for the firms appear to be increasingly uphill as economic recovery has been sluggish since the country existed a recession in the third quarter of 2017.

The country’s GDP expanded by 2.01 percent in the three months through March 2019, from a year earlier; that compares with 2.4 percent expansion in the fourth quarter.

While inflation figure for the month of June fell to a 12 months low of 11.22 percent, the figure, however, falls below the central bank’s target range of 6 percent and 9 percent.

Further exacerbating the already anemic position of consumer goods firms is the menacing Apapa gridlock, as goods remain trapped at the ports, resulting in disruption in production process, a situation that undermines profit margins.

Consequently, the cumulative average net profit margin of these firms fell to 4.68 percent in June 2019 from 6.50 percent the previous year.

On a comparative basis, margins fell slightly to 7.35 percent in June 2018 from 7.68 percent in June 2017. However, margins rose to 7.68 percent in June 2017 from 4.91 percent in June 2016.

A deteriorating margin shows firms are inefficient and are unable to turn each Naira generated in sales into higher profit.

Valuations have been poor since there hasn’t been a marked increase in revenue as a bleak macroeconomic outlook and lack of policy direction by the President Muhammadu Buhari led administration has forced investors to hold on to their money, resulting in stock market rout.

Following the stomach-churning performance of stocks since the start of the year, as the All-share Index (ASI) fell below the 28,000 psychological mark to settle at 27,630.46 points, year to date losses widened to 12.09 percent.

A breakdown of the figures shows Nestle Nigeria’s net income increased by 22.31 percent in 2019-18, but it dipped by 19.43 percent in 2018-17. It surged by 29.88 percent in 2017-16.

Unilever Nigeria’s net income fell by 38.54 percent in 2019-18, while it was up 5.53 percent in 2018-17, but it surged by 236.22 percent in 2017-16.