2 July 2018 ( Lagos ) : In line with their expectation, the Nigerian manufacturing sector has recorded renewed momentum so far in 2018. Notably, Q1’18 GDP figures showed a 5.5% y/y growth (Q4’17: 2.2% y/y) for the Food & Beverages sector, outperforming 3.4% y/y and 2.0% y/y growth for the Manufacturing sector and overall broader economy respectively. 

Analysts believe the strong growth in sector has been specifically driven by easing production constraints and the multiplier effects from improving economic conditions on both consumers and producers. Given that the lifeblood of the consumer goods sector is the strength of consumer spending, Analysts believe the notable moderation in inflation – from the 2017 average of 16.6% to the ytd average of 13.4% – would have a more substantial effect on stabilizing growth in the sector even as consumer wallets recover and majority of FMCGs are expected to keep price increases minimal. 

Analysts expect their outlook of sustained stability in the macroeconomic environment to drive a full-year acceleration for the consumer goods sector, with potential positive developments outsizing downside factors. Most notably, Analysts believe increased spending that accompanies budget passage, electioneering and the festive season will support spending in H2’18. 

Whilst the fiscal multiplier from these events did not noticeably materialize in H2’14, the last pre-election period, Analysts believe a seemingly better economic outlook will drive a more visible effect. Particularly, the lower inflationary and stable exchange rate environment will provide a good cushion for the fragile but improving operating and spending environment. 

Analysts also point out a potential wildcard for H2’18 – Minimum Wage Implementation. Earlier this year, the Federal Government announced that a new minimum wage (labour congress pushing for a 269% increase) could potentially be ready by the end of the of the year if bureaucratic processes are expedited amidst mounting pressures from labour unions. 

While developments on this proposal remain highly sparse and the timeline seems quite ambitious, Analysts do not rule out the chances of sudden progress on this front noting the administration’s high sensitivity to public opinion as elections draw nearer. On a more downbeat note, Analysts highlight that consumer confidence in the economy remains weak and according to the CBN’s Quarterly Consumer Expectations Survey, the consumer confidence index returned to negative territory in Q1’18 (-6.4 points vs an average -14.0 points in 2017), after a modest positive showing in Q4’17 (+1.0 points). 

Ceteris paribus, Analysts forecast a stronger second half for the consumer goods sector in 2018 noting the earlier stated factors, with the major downside risk coming from demand driven inflation during this time Muted price increases mean normalized revenue growth in 2018 

In line with their expectations, revenue growth for consumer goods companies in 2018 has been more modest and volume-driven compared to the 2017 period that was characterized with double-digit price increases. On average, revenue across their coverage companies declined 4% in Q1’18, compared to their -5% y/y estimate amidst mixed drivers across the different sub-sectors in the industry. 

While muted price changes have been met with recovery in consumer spending and volumes in some segments, notable price cuts and other adverse revenue drivers have weakened topline in other sub-sectors. Save for the broad sector drivers however, company growth rates have also been differentiated by more internal strategies and investments. 

That said, Analysts expect aggregate volumes to be supported by stronger spending from both public and private agents in H2’18 as consumer goods continue to account for the bulk of a lot of Nigerian’s spending basket. Demand for non-durable consumer products will continue to outweigh that of durables, a characteristic of consumer behaviour during the period of economic recovery following a recession. 

Meanwhile, Analysts expect the vast number of Nigerian consumers to continue to upweight value offerings available on the shelves. Overall, Analysts forecast an average FY’18 revenue growth of 3% across their consumer goods coverage universe, with the consumer packaged goods and brewery sub-sectors outperforming the food sector. 

Consumer Packaged Goods – Innovative market strategies required to support growth 

For this report, Analysts define the consumer packaged goods sub-sector as the companies that produce home and personal care (HPC) products – a segment Unilever Nigeria (UNILEVER) and PZ Cussons Nigeria (PZ) fall into. Whilst Analysts believe recovering consumer demand and improving spending pattern will be supportive of mild demand growth in the HPC segment, Analysts expect strong performance across the companies to only be driven by innovative strategies and targeted investments, through promotional campaigns, product introductions or distribution channels to driver faster sales traction. 

Nigeria’s HPC segment is generally characterized as highly competitive with a large part of the market dominated by imported products from independent retailers – particularly skin care, cosmetics, deodorants, etc – while localized multinationals strictly produce and dominate more “mass market” products which include bathing soaps, detergents, toothpaste, etc. 

Nonetheless, imported competition is expected to remain a major threat for the local producers, especially given improving FX liquidity. Amid heightened competition and less input cost pressures, Analysts expect price increases to be very modest. 

Notably, UNILEVER’s HPC segment recorded a 24% q/q and 17% y/y revenue growth in Q1’18. Whilst this was supported by mildly higher prices on select products, volume growth was the major driver amidst introduction of new product lines, specifically on its top-selling Sunlight detergent, and higher activities from distribution channels. 

However, a trading update released on 14 June 2018 by PZ Cussons UK was less optimistic about its Nigerian subsidiary, stating that intense competition amidst subdued buying levels has pressured volumes and margins. The company recorded 7% y/y revenue decline in its Q3’17/18 period ended February 2018, below their 6% growth expectation. 

Whilst Analysts expect PZ’s 2018 revenue performance to come in weaker than its major peer (UNILEVER), the parent company stated new initiatives to support growth; including packaging reduction, a tactic already used by other market players to encourage patronage from cash-strapped consumers, and product mix rationalization. 

Analysts believe these will support stronger output in H2’18. Overall, the HPC segment is expected to record a c.15% top line growth rate in 2018, solely driven by UNILEVER’s expected strong performance. 

Reporting for EasyKobo on Monday , 2 July 2018 2018 in Lagos, Nigeria

Source: Analysts at Vetiva Capital Management Limited.