Slower H1 for FMCGs as pandemic hits demand, production

The financial results of many Fast-Moving consumer Goods (FMCGs) companies have been on the average, a sober period for many operators as growth decelerated, profit narrowed, market capitalisation stagnated or dwindled in some cases, and some confirmed their projection of worse performance for the year.

For many, year 2019 had ushered a promising and strong 2020, as the Central Bank of Nigeria’s (CBN’s) manufacturing sector purchasing managers index (PMI) stood at 60.8, indicating expansion in the manufacturing sector for the thirty-third consecutive month.
But in 2020, the story has flipped with the PMI for July 2020 slumping to 44.9 indicating manufacturing sector contractions, an indication of worsening production and demand.

With the coronavirus pandemic forcing Nigerian bars, restaurants, hotels and event centres to shut down or maintain partial operation in some cases, operators in the food and beverages sector may have to contend with newer challenges of poor demand and slow production.

Already, weakened purchasing power of consumers and higher costs of drinks as a result of excise duty introduced in 2018, have led to slump in demand for alcoholic and non-alcoholic beverages.

With the COVID-19 environment, there are concerns about stimulating demand, considering that many events and parties that account for large consumption and demand may not happen.

Nigerian Breweries half year (H1) 2020 results showed that gross revenue declined by 21.0% y/y (H1-20: -10.8% y/y) in Q2, the largest decline on record, as volumes were negatively impacted by the imposition of lockdowns across major cities in Nigeria. Its revenue dropped from N170 billion in H1 2019 to N152 billion in the comparable period.

There was significant demand disruption, as on-trade sales channels (hotels, bars, restaurants, clubs, etc), which accounted for 64 per cent of beer industry sales, were effectively cut off as these businesses shut down operations during the quarter.

Supply was also affected due to a COVID-19-induced ban on the distribution of alcoholic beverages for much of the quarter. On a quarter-on-quarter basis, net revenue declined 17.4%.

Gross profit margin printed 35.4% in Q2-20, 675bps lower than in Q2-19, and the weakest reading since Q3-18. The margin compression is indicative of a slowdown of volumes in the premium segment amidst the disruption in on-trade sales, as well as the inflationary impact on input costs – cost of goods sold was upwardly sticky, declining by only 8.1%, much slower than revenue.

For Guinness Nigeria Plc, it has already notified investors and regulators that the adverse impact of the sharp contraction in economic activities, and the knock-on effect of the COVID-19 lockdown took a toll on the on-trade segment of the business across all its markets.

According to the brewer, production and revenues have thus been negatively affected, adding that due to a combination of the impact of COVID-19 and the asset impairment, it expects the profitability of the company for the Financial Year to June 30th, 2020, to be impacted.

Unilever Nigeria also posted its H1 2020 losses since at least 2013, according to available NSE records, suggesting that the firm and others in similar industries may be up for a significantly challenging year.

For Tantalizers Plc, revenue and profit dwindled during the period. Profit dropped to N200.67 million in H1 2020 from N283.26 million, while revenue closed lower at N433.8 million from N638.75 million.

UAC of Nigeria Plc followed in the same manner as revenue declined 8.7% YoY to ₦36.6 billion in H1 2020 from N40.1 billion in H1 2019; gross profit fell 16.1% YoY to ₦7.0 billion, while earnings before interest and taxes (EBIT) slipped 72.9% to ₦0.8 billion in H1 2020 with earnings before interest and taxes (EBIT) margin falling 535 basis points YoY to 2.3%.

Commenting on the performance, Group Managing Director, Folasope Aiyesimoju, said: “In the first half of 2020, our plans were disrupted by the impact of the COVID-19 pandemic. Revenues declined 1.8% year on year with operations impacted by necessary but stringent restrictions to the movement of people and goods, particularly in the month of April. We are encouraged by the performance of our businesses in May and June but remain concerned about continued input cost pressure.”

For Nestle, however, impact on revenue was marginal but profit took a hit. Revenue dropped by one per cent from N141.9 billion in H1 2019 to N141 billion in 2020, while profit closed lower at N21.8 billion from N26.2 billion in 2019.

The same story did not apply to Cadbury as revenue declined by 18.2% to N15.9billion from N19.5billion in the previous quarter, while profit after tax fell 19.9% to N537million.

On March 31, 2020, the President Muhammadu Buhari announced a total lockdown of economic activities in Lagos, Abuja and Ogun states to combat the COVID- 19 pandemic. The lockdown was gradually eased starting from May 4.

During that period (April and May), 38 percent of workers stopped working due to disruptions across sectors of the economy, the National Bureau of Statistics (NBS) estimated. The poorest households formed the highest of workers that stopped working (45 percent), but the rate was also high for the wealthiest households (39 percent). The middle-class saw a rate of 42 percent, the second-highest.

The impact of the COVID- 19 pandemic had a negative effect on Nigeria households’ total income, as a high rate of households reported income loss since mid- March. 79 percent of households reported that their total income decreased.

The performance of FMCGs “continues to reflect the challenging operating conditions as pressured consumer wallet continues to impact sales, while weaker exchange rate, poor FX liquidity and rising inflation continue to impact input and fixed costs,” said analysts at Cordros Securities.

According to the 2019 Household consumption expenditure report released by the National Bureau of Statistics (NBS), out of the N23 trillion Nigerians spent on food, households spent N551.2 billion on non-alcoholic drinks, N205.5 billion on sugar, sweets and confectionary, and N150.3 billion on alcoholic drinks.

For operators in the Food, Beverage and Tobacco sector, confidence in the economy fell to 54.3 points in Q1 2020 from 61.2 points recorded in Q4 2019.

To help the manufacturing sector, the Manufacturers Association of Nigeria (MAN), urged the government to reverse the Value Added Tax Rate back to the pre-2020 Finance Act rate, and reduce the Personal Income Tax to a flat rate of 10% for one-year effective April 2020.

According to MAN, this will improve the disposable income of Nigerian workers, stimulate consumption, promote an upsurge in demand and increase production output.

“We urge the government to grant manufacturers waivers from all demurrages payable between February and July 2020, especially those occasioned by the lockdown directives of Government and others associated with COVID-19 pandemic.

“Establish a special bailout fund for the manufacturing sector with set deliverables on the number of jobs to be created, the volume of export, quantum of locally raw materials utilized and projected revenue.

“Support manufacturing concerns with existing loan facilities by reviewing the terms, especially reducing interest rates to 5% with two years moratorium. For manufacturers that are investing in order to scale up production should be granted loans at 5% interest rate for a period of 5 to 7 years. This measure will no doubt improve liquidity and ramp up productivity in the manufacturing sector in a manner that will cover up for obvious losses due to COVID-19,” MAN added.