Manufacturers Wail As Unsold Goods Pile Up In Warehouses

…As cost of living rises, purchasing power drops

Manufacturers of fast-moving consumer goods, FMCG are in dire agony over the continued rise in unsold goods in their warehouses, a development which would lead to a further significant decline in output level in the sector.

The continued rise in unsold goods is caused by two factors namely the rising cost of living and the declining purchasing power of the citizens.

Financial Vanguard’s findings show that due to the downturn in the consumers’ disposable income, the stock of unsold goods for manufacturers in the fast-moving consumer good, FMCG, sector of the economy rose Year-on-Year (YoY) by 27 per cent during the financial year ended December 31, 2023. The sector operators also indicated that the situation is worsening in 2024 as they expect to report over a 30 per cent rise in unsold goods in the first quarter of the year, Q1’24.

Consequently, they hinted that the output levels have been going down steadily since mid-last year, when the Central Bank of Nigeria (CBN), the report showed that capacity utilisation in the food and beverages sector fell to 49 per cent from 61 per cent in the corresponding period in 2022, indicating a 20 percentage point decline.

Nigerians have been battling with inflationary pressures with its curtailing effect on consumers’ purchasing power in the last eighteen months.

The headline inflation rate has been on a constant increase, rising to 28.82 percent in December 2023 from 21.34 per cent in December 2022, triggered by various factors including high energy cost, and insecurity, especially in the farming communities in Nigeria, among others.

Within the same period also, food inflation surged to 33.93 percent from 23.75 percent a year ago.

The trend has continued unabated in 2024 with headline and food inflation moving further up to 33.69 per cent and 40.53 percent in April from 29.90 percent and 35.41 percent at the beginning of the year respectively.

A combination of the massive increase in inflation coupled with naira devaluation had resulted in price mark up by manufacturers to cover high input costs.

But this cost coverage measure has also alienated many of their consumers, thereby slowing down sales.

Financial Vanguard’s findings from the operations of 15 major FMCGs clearly show a burdensome price index escalating the stock of unsold goods amounting to N104.45 billion despite the huge cut in production quantity.

The companies are BUA Foods Plc, Dangote Sugar Refinery Plc, Nestle Nigeria Plc, Presco Plc, Cadbury Nigeria Plc, Okomu Oil Nigeria Plc, NASCON Allied Industries Plc, May & Baker Nigeria Plc, Fidson Healthcare Plc, and Neimeth Pharmaceuticals Plc.

Others are Guinness Nigeria Plc, Champion Breweries Plc, Flour Mills of Nigeria Plc, Nigerian Breweries Plc and Honeywell Flour Mills Plc.

Companies’ records

The breakdown shows that while a number of the companies recorded a reduction in the level of their stock of unsold goods, palm oil producers – Okomu Oil Palm Plc and Presco – took the biggest hit. Industry observers believe the oil palm industry should not be recording such poor performance given how essential the product is to the average Nigerian family.

Presco, the leading palm oil producer, recorded the highest stockpile of unsold goods as the inventory of finished unsold goods rose by 249.4 per cent to N1.45 billion, followed by May & Baker Plc and Okomu Oil Palm, the second largest palm oil producer, with 160.2 per cent and 124 percent increase in their inventory of unsold goods respectively.

Dangote Sugar Refinery Plc, Flour Mills of Nigeria Plc and Cadbury Nigeria Plc also ranked among the worst with record increases of 92.9 percent to N9.76 billion, 74.1 percent to N30.75 billion and 71.5 per cent to N3.55 billion in their stock of unsold goods respectively.

Strangely, all brewers in the report recorded reduction in their unsold goods.

Until economic indices stabilise, situation may persist —NACCIMA

Reacting, Director General of the Nigerian Association of Chamber of Commerce, Industry, Mines and Agriculture (NACCIMA), Sola Obadimu, said the findings are not surprising, adding that until economic indices are stable, the situation may persist.

His words: “As I always say, we’re in a ‘stagflation’ situation, meaning – persistent rising inflation and high unemployment rates in a static wage situation. The wages are not just static, they’re declining in value in real terms as a result of inflation. Consumers (and industries as well) are also vulnerable/defenceless victims of rising energy costs, unstable forex rates and debilitating infrastructure generally, etc. So, it’s no surprise that inventories are growing.

“We’re all aware of the fact that some major multinationals declared losses for 2023 as a result of the unfavourable economic climate and some chose to leave while others are contemplating. It’s easier for local industries and businesses whose owners can quickly take decisions in the face of constantly changing critical economic indices. These multinationals sometimes have to seek aporovals for some major situations from their global Head Offices which may take a while to come due to lack of adequate understanding of the local environment.

“So, unless we get some sort of stability in critical economic indices and consumer purchasing power increases in value terms, the story may not agreeably be too different in 2024.”

Consumers preference has shifted — Muda Yusuf

Muda Yusuf, Director General, Center for the Promotion of Public Enterprise (CCPE), who blamed the mounting inventory of unsold goods on depreciation in the value of the naira, and high energy cost among others, said that consumers are now reviewing their preferences and are shifting to cheaper substitutes where available.

He said there’s a need to bring down the exchange rate and energy cost to effect a reduction in companies’ cost of production.

He said: “The high level of inventory of finished goods, particularly the unsold inventory, are the consequences of high production cost and the high operating cost that the manufacturers in the FMCG sector have been grappling with over the last one to two years.

“There have been challenges of escalation of cost arising from exchange rate depreciation, high energy cost, high cost of logistics and challenges around the high cost of funds.

“These are the key issues and, naturally, when the production and operating costs increase, the natural thing is for the increase in cost to be passed on to the consumers in the form of high prices.

“So, what we are seeing is that the prices of some of these products have gone up significantly and some by as high as 50% and in some cases, even 100% in the last year.

“And in an environment where the purchasing power is also weak, where the level of poverty is also high, naturally, these inventories will be very slow in terms of outflow from the warehouses because of the weak purchasing power of the consumers.

“There’s also an element of consumer resistance due to this high cost of production. There is also an element of substitution. For some of those products that have substitutes, consumers may decide to go for cheaper substitutes because of the high prices.

“So, basically, these are the factors that are responsible for the high level of inventory of finished goods that we have seen in recent times.”

Speaking on the way out, Yusuf said there’s a need to put strategies in place to ensure a reduction in operating cost, a reduction in logistics costs and a strengthening of the purchasing power of the citizens.

Need to stabilize FX market

He expressed the need to stabilize and boost supply in the foreign exchange (FX) market in order to moderate the depreciation of the currency.

According to him, this will result in a reduction in operating and production cost.

“Once the currency strengthens, the cost of production will, naturally, be less; the cost of logistics, if the energy crisis goes down, will also begin to decelerate.

“Then, of course, there’s also the element of the cost of clearance of cargo.

“These cargoes could be raw materials, it could be intermediate products, and it could be machinery that is used by any of these manufacturers.

“The current methodology of determining the exchange rate for the computation of import duty has made the cost of cargo clearance very prohibitive.

“So, if the government through the fiscal and monetary authorities could do an adjustment to this by fixing the exchange rate for the computation of import duty to between N800 – N1,000/$ and this is fixed for may be three months, that will also help to bring down some of this cost and make the products a lot more affordable because the key issue here is the affordability of these products.

The more affordable they are, the lesser the level of unsold goods,” Yusuf added.

According to him, “The danger in the level of this unsold inventory is that some of these products have expiry dates, which is another risk to these businesses.

It is a good thing that the government is talking about minimum wage. If the workers are empowered, we are likely to see an improvement in demand for some of these products.

“So, there’s a supply side issue to bring down the costs of production, operation and logistics and cost of funds.

“There’s also the demand side issue of empowering the consumer to have the purchasing power to buy these products.”

Rise in unsold goods weakens profitability — FSL Securities

Commenting also, Victor Chiazor, Head, Research at FSL Securities, said: “The 27% rise in inventory for players in the fast-moving consumer goods sector could be attributed to two factors.

“The first could be that the rise is a result of the company’s inability to drive sales due to the rising cost of goods which may have slowed down the volume of goods sold during the period, leading to a rise in inventory.

“Also the second reason for the increase in inventory could be deliberate and the company may decide to increase its inventory position to enable it to plan around the significant volatility in the cost of goods which has remained unpredictable in recent times.

“This helps the company manage the risk around a possible increase in production cost.
“However, whatever the case may be, it has a terrible effect on the course of operation for the business as a slowdown in sales will weaken profitability and a deliberate strategy to increase inventory also ties down capital which could have been raised via borrowing at a high-interest rate given the interest rate environment.

“The government will have to deal with issues around FX volatility, rising energy cost, rising cost of borrowing, bad infrastructure amongst other issues, all of which increase input cost for the manufacturer.”

Source:- Vanguardngr