By Milcah Tanimu

…As Cost of Living Rises, Purchasing Power Drops

Manufacturers of fast-moving consumer goods (FMCG) are facing significant challenges as unsold goods continue to accumulate in their warehouses. This issue is driven by the rising cost of living and declining purchasing power among citizens, leading to a potential decline in output levels within the sector.

According to Financial Vanguard’s findings, the downturn in consumer disposable income resulted in a 27% year-on-year increase in unsold goods for FMCG manufacturers by the end of December 2023. The situation is expected to worsen in 2024, with predictions of over a 30% rise in unsold goods in the first quarter.

This surge in unsold goods has led to a steady decline in output levels since mid-2023. Reports indicate that capacity utilization in the food and beverages sector fell to 49% from 61% in the corresponding period in 2022, marking a 20 percentage point drop.

Nigerians have been grappling with rising inflation, which has severely impacted consumers’ purchasing power over the past eighteen months. Headline inflation rose to 28.82% in December 2023 from 21.34% in December 2022, driven by high energy costs and insecurity in farming communities. Food inflation also increased from 23.75% to 33.93% over the same period.

In 2024, this trend has continued, with headline inflation reaching 33.69% and food inflation at 40.53% in April, up from 29.90% and 35.41% at the start of the year, respectively. The combination of high inflation and naira devaluation has forced manufacturers to increase prices to cover rising input costs, further alienating consumers and slowing down sales.

An analysis of 15 major FMCGs reveals a significant escalation in the stock of unsold goods, totaling N104.45 billion, despite substantial cuts in production. Palm oil producers like Okomu Oil Palm Plc and Presco Plc have been hit the hardest. Presco’s inventory of unsold goods increased by 249.4% to N1.45 billion, while May & Baker Plc and Okomu Oil Palm saw increases of 160.2% and 124%, respectively.

Other companies experiencing significant increases in unsold goods include Dangote Sugar Refinery Plc, Flour Mills of Nigeria Plc, and Cadbury Nigeria Plc, with increases of 92.9%, 74.1%, and 71.5%, respectively.

Economic Stability Needed

Sola Obadimu, Director General of the Nigerian Association of Chamber of Commerce, Industry, Mines and Agriculture (NACCIMA), emphasized that until economic indices stabilize, the situation is unlikely to improve. He highlighted the persistent issue of ‘stagflation,’ characterized by rising inflation, high unemployment rates, and static or declining wages.

Muda Yusuf, Director General of the Center for the Promotion of Public Enterprise (CCPE), attributed the mounting inventory to factors such as naira depreciation and high energy costs. He noted that consumers are increasingly opting for cheaper substitutes and called for strategies to reduce operating and logistics costs while strengthening consumer purchasing power.

Need for FX Market Stabilization

Yusuf stressed the importance of stabilizing the foreign exchange market to moderate currency depreciation and reduce operating and production costs. He also suggested that adjusting the exchange rate for import duty computation could help lower production costs, making products more affordable and reducing the level of unsold goods.

Victor Chiazor, Head of Research at FSL Securities, highlighted that the increase in inventory could be due to either a slowdown in sales or a strategic decision to manage production cost volatility. He warned that both scenarios could negatively impact profitability and tie down capital, urging the government to address issues like FX volatility, rising energy costs, and poor infrastructure to alleviate the burden on manufacturers.