With a growing youthful population, estimated at about half of its entire population, Nigeria presents one of the best opportunities for consumer goods businesses. Other supporting factors include the return of relative peace to the Niger Delta region of the country, the rebound in oil prices and production as well as the government’s better budget execution. All these factors provide a good background for private consumption to thrive.
The Nigerian fast moving consumer goods (FMCG) sector involves the manufacture and marketing of soaps, detergents, home and personal care products, and electrical goods, as well as food and nutritional products. The sector comprises four major consumer companies - PZ, Unilever, Procter and Gamble (P&G) and Reckitt Benckiser (RB). Competition also includes some other fringe players. Of all, only PZ and Unilever are listed.
Driven by strong economic growth and a stable political environment, the FMCG sector in Nigeria grew by over 15% to a market size of around N130 billion (US$ 884 million) in 2008. Earnings for the two listed companies also grew appreciably, by over 20%, though the impact of the credit crunch and inflationary pressures from rising commodity prices were beginning to be felt by H2 2008.
Recent years have seen major participants step up their advertising and promotion campaigns, and increase the number of their brand lines, as well as their manufacturing capacity, with a view to capturing the rising demand. Using private consumption expenditure growth as a proxy, factoring in sales growth figures for both PZ and Unilever, and adjusting for inflation, we believe demand growth has been in the 5-10% range. We expect the sector to continue to see double-digit sales growth in line with the Nigerian economic performance.
Our findings indicate that the sector’s attractive growth prospects have led to the entry of a number of niche players, consequently increasing the level of competition in the sector. This has subsequently put mild pressure on the sector’s margins. The major players however have continued to position themselves to capture the significant growth opportunities that the Nigerian economy presents and consequently improve on their market share. The main success drivers include brand recognition and visibility, a balanced portfolio offering, operational efficiency, market penetration and consumer loyalty.
One other key success factor is product reach. To ensure adequate market penetration, companies in the sector have employed various approaches for the distribution of their products. Some employ dedicated main distributors covering different geographical regions with a regional manager to ensure that products are placed, priced and sold at stated terms. Others on the other hand, adopt a combination of key distributors (wholesalers) and a merchandising force.
One of the positive drivers that has helped boost the industry locally is the high level of import tariffs. Finished consumer products and luxury goods are levied at a higher level of tariffs. In addition, certain categories of soaps and detergents feature on the Nigerian Customs Service’s import prohibition list. The sector should continue to benefit from the tariff structure as we do not expect any significant change in the foreseeable future.
The sector however is not immune from some of the challenges that characterises the Nigerian business environment. The FMCG sector imports, on average, about 60-70% of its raw materials. These include fats and soap noodles for soap manufacture, chemicals for detergents, milk for yoghurts, paper for sanitary towels, and plastics and other packaging materials. As such, they face some major cost challenges which derive from the volatility in global commodity prices and exchange rates.
These cost challenges have significant implications for pricing. Given the volume-driven nature of the business, pricing plays a major role in the companies' strategies. Industry sources indicate that price sensitivity varies across product category. For example, consumers are less price-sensitive in childcare products than in the detergent and laundry soap segment. Nevertheless, regardless of the product category, moderate levels of price increases are tolerated by consumers, depending on how appealing the brand is.
Other major challenges confronting the sector are power supply and distribution. We believe energy costs account for about 10-15% of the firms' total operating expenses. In addition, the deplorable state of Nigerian roads and the absence of alternative modes of transportation for bulk goods make product distribution inefficient. The companies are responding to the power supply challenges by opting for cheaper alternatives to diesel- and petrol-powered generators. A combination of solar and gas turbines to power generators are common in the sector.
Despite these challenges, the long term outlook for the sector remains positive. We believe the recent efforts by the government at diversifying the Nigerian economy, the rebound in oil prices and production and the government's attention to fiscal discipline bodes well for consumer purchasing power, which should be beneficial for the sector.