Cardinal Stone’s report warns that multinational FMCG companies may exit Nigeria in 2024 unless the operating environment improves.
The report underscores the adverse effects of the substantial depreciation of the naira.
FMCG firms are expected to reimagine operational strategies in 2024 to enhance cost efficiency.
Eko Hot Blog reports that multinational corporations operating in the Fast Moving Consumer Goods (FMCG) subsector may consider exiting the country this year unless there is a notable improvement in the prevailing operating environment, warns a recent report by financial solutions firm Cardinal Stone.
The report Titled ‘Strategic Resilience: Sailing Through Business Disruptions,’ emphasizes that persistently high operating costs pose a significant challenge for FMCG firms in Nigeria.
The sector, heavily impacted by fluctuations in commodity prices, exchange rates, import and clearing duties, as well as freight costs, may not benefit from the global moderation in commodity prices due to the substantial depreciation of the naira.
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The report highlights the depreciation of the naira, which dropped from N422.00/$ in June 2023 to N951.94/$ in December 2023, following the Central Bank of Nigeria’s decision to float the exchange rate.
This move aimed to narrow the gap between the official rate and the alternative market and address the persistent forex scarcity challenge in the country.
- “In 2024, we expect companies to continue to re-imagine their operational strategies to achieve cost efficiency,” states the report.
It anticipates potential collaboration among FMCGs to enhance economies of scale, diversify product portfolios, achieve revenue and cost synergies, introduce technological innovations, and strengthen the financial position of the resulting entity.
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However, the report cautions that an alternative scenario might involve firms exiting the operating environment or withdrawing from high-cost segments, drawing parallels with previous cases involving Procter and Gamble, GSK, Pernod Ricard, and Unilever.
The report also highlights potential challenges stemming from a weaker currency, including an increase in diesel costs. It notes that diesel prices reached a new high of N1,004.98 per litre in the second half of 2023 due to a weakened currency.
Additionally, the report foresees the drag from higher energy costs extending into 2024 unless there is a surprising naira appreciation.
- “Similarly, borrowings could be elevated on the combined impact of dollar-denominated debts that could spike when translated to naira and the surge in naira values of operating and machinery costs that are targeted to be funded with foreign currencies. The knock-on effect of these changes could translate to an increase in effective interest rates,” the report concludes.
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