Leveraging backward integration for resilience in pandemic

The last year has shown how the Coronavirus pandemic exposes the vulnerability of countries and companies that rely heavily on a limited number of trading partners or lack local support. With the disruption in global supply chains, every nation is beginning to resort to its local capacity for survival. Like never before, Nigerian manufacturers carry the burden of bridging the supply gap. FEMI ADEKOYA writes that some food production firms are reversing importation through backward integration.

Backward integration is a well-known competitive strategy. By taking control of its supply chain, an organisation can bring down the costs as well as guarantee access to key materials.

With the pandemic and consequent supply chain disruptions, Nigerian firms are beginning to look inward for alternatives, especially at a time access to raw materials remains a business constraint for growth and profitability.

With 6.5 per cent decline in raw materials import in the first quarter of 2021, manufacturers’ concern about access to foreign exchange for critical materials needed for local production remain a lingering issue needed to address capacity utilisation.

Local manufacturers had explained that while the economy is beginning to recover from the shocks of the COVID-19 pandemic, operating challenges in the economy remain.

The latest trade data by the National Bureau of Statistics (NBS) showed that the value of total trade in raw material stood at N711.8billion, accounting for 7.3 per cent of total trade. The import component was valued at N669.2billion while the export component stood at N42.7billion.

To wade through these challenges, local manufacturers are exploiting opportunities offered through backward integration, especially those from local substitutes.

Indeed, the Director-General of the Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir, had told The Guardian that the negative impact of the depreciation in Naira value and acute shortage of forex as huge challenges in the first quarter of 2021, adding that the situation calls for more intentional actions from the government with a focus on supporting productive activities to drive better performance in the remaining quarters of the year.

Backward integration as growth driver
By championing backward integration programmes to expand value delivery across all value chains, including strategic partnerships with smallholder farmers, the Flour Mills of Nigeria Plc (FMN) has stated that it was able to record an average revenue gain of 34 per cent across all business sectors.

Indeed, its audited financial result for the year ended March 31, 2021, showed an innovation-driven revenue performance underlined by an accelerated fourth quarter growth against the same period of preceding year.

The Group achieved topline growth for the year, aided by gains from its agro-allied turnaround strategy.

Specifically, FMN posted a revenue of N771.6 billion for the year, showing an increase of 34.5 per cent compared with the N573.77 billion recorded the previous year. Net finance cost fell from N17.5 billion to N15 billion, resulting from better cost and financial management strategy.

Indeed, its backward integration programme has been expanded across all value chains, including strategic partnerships with smallholder farmers, resulting in an average revenue gain of 34 per cent across all business sectors.

Also, in line with the Federal Government’s commitment to making Nigeria sugar self-sufficient, Golden Sugar Company, its subsidiary, expanded investments in backward integration to engage more sugarcane outgrowers at its Sunti Sugar Estate valued at N64 billion of investment under the Nigeria Sugar Masterplan Plan (NSMP) and also the first and only Greenfield initiative currently producing raw sugar in the country.

Similarly, the firm’s food business grew organically, driven by constant product innovation and transformation in new markets, as well as operational efficiency through route-to-market investments and rapid expansion in the B2C sectors.

In his comments, the Group Managing Director, Mr. Omoboyede Olusanya, said: “Flour Mills emerges from the prevailing COVID-19 environment as a stronger, more resilient, flexible, and confident business as a result of the collective strategic actions made over our 60-year history. I want to thank all our employees for their patience and hard work as we consistently adapted to the year’s challenges and invested significantly in our purpose of feeding the nation every day.

“FMN is now harvesting the fruits of these efforts and remains committed to braving a continuously uncertain environment with cautious optimism, innovation, portfolio advancement and other strategies outlined in our recent sustainability report.”

Recently, at the Company’s ‘Facts behind the Sustainability Reporting’ held on the NGX, Group CEO Nigerian Exchange Group Plc, Mr Oscar Onyema said, “We count it a great success when more companies publish reports on performance on their key environmental, social and governance indicators as well as their commitments to creating a sustainable future.

“We commend the board and executive management of FMN for leading the charge to advance sustainability in the food and agro-allied sector, especially the priority given sustainability by the new management led by Mr Omoboyede Olusanya.”

Onyema added that the group was pleased that FMN chose to leverage the platform of sustainability reporting series, which is Global Reporting Initiative (GRI) referenced and aligned with sustainability reporting guidelines.

He disclosed that studies have also shown that sustainability reporting influences a company’s performance, as it can serve as a learning process for an organization to better understand and manage its impact on people and the planet, while also managing risks and managing new opportunities and identifying key actions towards creating a sustainable future.

In the year under review, FMN successfully issued N30 billion in corporate notes with tenors of five and seven years at 5.50 percent and 6.25 per cent, respectively, to strategically replace costly short-term facilities.

Highlights of the past year’s business performance by Flour Mills of Nigeria include a strong performance and show of resilience in a challenging year to capture first signs of economic recovery with accelerated Q4 growth vs last year (Q4’21 vs Q4’20) demonstrated in +44 per cent Revenue; +158 per cent earnings before tax (EBT) and profit after tax (PAT) of +211 per cent.

The Group further delivered impressive full-year top-line growth across all business segments with average revenue growth of 34 per cent. Profit After Tax reached N25.7 billion, up from N11.4 billion in 2019/2020 (127 per cent YoY Growth).

The leadership of the company pledged to maintain a consistent focus on strong discipline in operational and capital efficiency by increasing local content in group-wide supply chains and sustain its commitment to backward integration programs across all value chains.

Government support needed
The Nigerian Economic Summit Group (NESG), in its report on 2021 Macroeconomic Outlook titled: “The Four Priorities for the Nigerian Economy in 2021 and Beyond,” argued that government’s support is required to make the inflow of private investments into the manufacturing sector a reality as Nigeria’s recent experiences have shown that significant investments in the manufacturing sector were realised when there is an intersection of market opportunities and government support.

It, therefore, recommended that the federal and state governments should come up with industrial policy and sectoral plans for identified priority areas in the manufacturing sector. Besides, the government should also demonstrate commitment in implementing existing plans, provide targeted infrastructure and address the challenge of insecurity in the country.

The report described Nigeria’s manufacturing sector as an untapped gold mine that could be the answer to the country’s quest for improved foreign exchange earnings apart from the sale of crude oil that is currently the mainstay of Nigeria’s foreign exchange supply.

It stated that based on nominal GDP figures released by the National Bureau of Statistics (NBS), Nigeria’s manufacturing sector was valued at N19.54 trillion in 2020 against N16.78 trillion it commanded in 2019.

Similarly, the manufacturing sector’s share of nominal GDP was below 10 per cent between 2015 and 2018 despite improving economic growth figures. But its share of the GDP increased to 11.6 per cent in 2019 and 12.8 per cent in 2020. The increase in 2020 was attributed mainly to the high inflationary rate and the large decline in the output of critical sectors as a result of the restrictions placed to control the spread of COVID-19 pandemic disease.

But the NESG, however, warned that opportunities are not enough to attract significant investment into the Nigerian manufacturing sector, especially given the country’s history of policy inconsistency.

It said: “To attract significant investments and narrow the gap between potential and actual investments, federal government support for the sector is of utmost importance. Drawing from the experience of the few sub-sectors in manufacturing that have attracted investments in the last few decades, government support in the form of developing sector plans and intervening to resolve specific challenges faced by investors in the sector have been instrumental in attracting investment.

“When these two conditions are available, investors are more assured to make significant investments amidst structural challenges such as inadequate power supply and infrastructure deficit. Even when issues of policy inconsistency and regulatory heavy-handedness arise, they are often resolved while investors are protected by the government.