Interview : Chris McAllister, Ben Langat & Yaw Nsarkoh
What are some of the main infrastructure challenges that fast-moving consumer goods (FMCG) companies face in Nigeria?
CHRIS MCALLISTER: Energy provision is a huge burden on local manufacturers. The absence of reliable grid power is a major constraint on the cost competitiveness of Nigerian products in both the domestic and export markets. If Nigeria is to be developed through industrialisation and export-led growth, it is vital that it creates a stable and attractive regulatory environment that encourages investment in its power generation sector.
The other major constraint is the congestion in the port of Apapa, the vital organ through which the bulk of Nigerian imports and exports flow. The absence of an integrated plan and the persistent uncertainties between federal and state governments is indeed a source of concern for all. The resulting delays and high clearance costs continue to be a burden on the industry.
BEN LANGAT: Most factories are located in Nigeria’s south-west region, especially around Lagos. Dispatching goods around the country has become a major challenge, given the long distance to be covered, road insecurity and the high cost of fuel. For instance, it takes three days on average to drive a truck from Lagos to Kano, and the distance between the south-west and north-east regions spans 1800 km of poor road infrastructure. Logistics would stand to benefit significantly from upgrades such as a more efficient railway system.
If the security situation improves in the east of the country, waterways could also offer an attractive option for moving goods across states and regions. Along with logistics, power remains a big cost driver for manufacturers. The majority of factories are entirely powered by the manufacturers’ own generated electricity, which is very costly. Logistics and high energy costs put upwards pressure on the price of goods, restricting profit margins for both manufacturers and producers.
YAW NSARKOH: One of the key infrastructural barriers has long been the cost of energy and access to reliable power. Increasingly, there is a trend for FMCG companies to develop alternative decentralised methods of generating power, including solar and gas, out of pure necessity. However, these individual interventions are not as efficient as having economies of scale through a national infrastructure, pushing up supply chain costs.
The state of the roads is also an issue of importance, because consumer goods rely on road transport systems in order to distribute their products. Similarly, as the economy has grown and consumption has risen, the ports system has become a major bottleneck and hindered expansion. We have also witnessed infrastructure challenges with regards to the diminishing availability of trucks, something that is driving up the prices of vehicles.
How can backward integration and local content be further increased across industries?
LANGAT: Backward integration and local content development will depend on manufacturers’ engagement with their supply chains. These strategies will for the most part be industry specific. For example, domestic dairy farming is still at the subsistence level, so we need to find ways to develop a sustainable milk producing industry to increase local sourcing. This will rely on Nigerian farmers transforming their milk production, which is mostly used for their communities’ consumption, into an economic and commercially viable activity.
Introducing the right breeds of cows, transferring the appropriate know-how between people and providing the right feed will be key to such an endeavour. Along with government support, all dairy companies will have a crucial role to play in this.
NSARKOH: Backward integration is not just important because it is a standalone variable; it is also important because it delivers superior economics. There are several projects through which we are trying to domesticate our supply chain as much as possible, and that is true of FMCG companies generally. As we grow our portfolio and enter new categories, we will increasingly diversify the sources of raw materials that we require. Looking forward, it is important to us to source maize, cassava and sorbitol locally, as well as starches for the use of bouillon cubes and spices. Generally, FMCG companies generally are working alongside partners in these areas to build up the ecosystem and elevate our agricultural capabilities across the whole country.
MCALLISTER: Backwards integration for FMCG companies remains a challenge due to the lack of a suitable quality of inputs. Companies are already spending a lot of time supporting local suppliers to upgrade their products to international standards. Attracting international companies to invest in the market is another way to boost backward integration. The federal government should shape the tax and regulatory framework to support companies that invest in the broadening and deepening of the Nigerian economy, along the lines of the now-suspended Export Expansion Grant programme which has been rewarding Nigerian exporters who fulfilled minimum levels of local content.
How do you expect consumer patterns in your sector to evolve in the short to medium term?
NSARKOH: The middle class has been under pressure, and this continuing squeeze will polarise the market in the near future. The top end will thrive again, with the small percentage of high-net-worth individuals still significant in terms of ultimate numbers. As consumption from that group continues to rise, their consumer goods needs will be very important. At the same time, we continue to see a large element of the population in the mass market.
Up to 95% of the population is living on an average of under $5.50 a day. As the number of people who are under economic pressure is very high, both branding and pricing will become increasingly important, among all socio-economic classes and groups.
MCALLISTER: During the economic downturn of 2014-17, successful FMCG companies were driven to enhance their portfolios, particularly to create greater value for those consumers that were most severely impacted by the recession. Now, we are broadly optimistic about consumption in the medium term. The economy has returned to growth and there seems to be the beginning of some genuine diversification away from oil, which is important for long-term sustainability. With adequate policy implementation, the combination of Nigeria’s natural entrepreneurialism and large demographic has the potential to transform Nigeria into an African economic powerhouse, possibly within a generation.
LANGAT: Due to tough economic circumstances, the whole consumer goods sector, including the dairy industry, experienced a decline in volume of output as consumers traded down. However, in recent times we have seen a more positive trend, with consistent monthly drops in inflation, and the dairy industry continues to evolve. Some consumers prefer well-known milk varieties, such as evaporated and powdered, while others prefer ready-to-consume types. There are also varieties such as full-cream and filled milk. Customer preference generally depends on affordability and specific needs.
When it comes to dairy market penetration, various parts of the country have different consumption habits. There is an opportunity for growth across diverse demographic and income groups, and continuous education on the benefits of adding dairy to one’s diet will surely drive greater consumption.