Recession hits consumer goods firms as inventories pile

Fast Moving Consumer Goods (FMCG) firms are one of the hardest hit from Nigeria’s economic recession.

This is because these firms are not moving inventories off the shelves as weak consumer spending caused by rising inflation and spiralling unemployment curbs demand for products, leading to very low stock or inventory turnover.

What this simply means is that inventories are languishing in the warehouses or on the shelves.

The average inventory turnover ratio of 15 firms operating in the consumer goods sector stood at 3.07, which means on average the firms turned over goods 3 times during the year meaning it would take approximately 118 days or 4 months to sell an entire inventory or complete one turn, (see table).

The worse hit is PZ Cussons Nigeria, which is majority-owned by the Manchester, U.K.-based soap-maker. It recorded an inventory stock turnover ratio of 0.55, which means it sold only half of its stock during the year and it would take the company one year and 10 months to sell entire inventory in the warehouse.

Vitafoam Nigeria Plc and Guinness Nigeria Plc recorded inventory turnover ratios of 0.57 and 0.98 while the number of days stocks were in warehouse was 640 days and 337 days respectively.

However, of all these firms, Dangote Flour Mills had fewer inventories in the warehouse as stock turn was 7.40 while number of days stock was on shelves was 49 days. This is evidenced in the flour miller’s strong sales which grew by 62.41 percent in the period under review.

When inventories accumulate due to decrease in consumption, businesses respond by reducing orders of goods from suppliers and such producers are faced with cut back in demand and many workers are laid off and unemployment rate swells.

John Chukwu, managing director and chief executive officer of Cowry Asset Management Limited told BMI that because the economic confidence is very low, it is difficult for people to continue to buy goods as they used to as inflation has eaten deep into their wallets.

“And this affected the inventories of consumer goods firms,” said Chukwu.

“Consumers are staying away from consumption and that is expected in a period of recession,” added Chukwu.

Some retailers, supermarket owners and confectionary firms tell BMI that they are finding it difficult to replenish stocks of inventories given the severe dollar shortage.

They said those that have inventories are clinging to them because when it is exhausted, getting hard currency to import goods may be inaccessible.

Nigeria, Africa’s largest oil producer has been going through its worst economic recession in 25 years due to lower oil price and a shortage of dollars.

In order to stop the external reserve from continued bleeding, the central bank pegged the currency at N197-N199 for 15 months.

The policy caused dollar shortages and many companies were forced to source dollars at the inaccessible parallel market while the importation of raw materials and machinery became very expensive.

Firms scaled back on expansion plans as they shed jobs while investors fled the country as they fretted about a sudden devaluation of the naira.

Higher food stuffs and gasoline prices also dampened consumer wallets and their appetite for consumer goods waned. Inflation rose to 18.30 percent as of October 2016, the highest in 11 years.

The country’s gross domestic product (GDP) contracted by 2.10 percent in the second quarter, while the IMF forecasts that the economy will dip 1.70 percent by 2016.

While the Apex bank has adopted a flexible exchange rate policy in June with a view to allowing the naira float freely, manufacturers still bemoan dollar shortages.

“As the economy is failing, these firms are finding it difficult to push their goods to the markets and as such it is affecting their stock turnover,” summed Chukwu.

 

BALA AUGIE