Nestle Foods Nigeria recorded a 5 percent growth in 2013 and N28 earnings per share despite a turbulent end to the year, that saw cost of sales shoot up in the fourth qaurter of 2013, which resulted in a high gross margin pressure and a 10 percent profit decline.
According to the company, revenue in the food division was flat in first half of 2013, adding that the slow revenue growth was as a result of increase in price of the Maggi stock cube to distributors which would have squeezed their margins, and hence resulted in volume declines.
The beverage section of the company however did well; with revenue growth exceeding expected levels.
Investment banking firm, RenCap in a report identified pricing as the major challenge facing consumer companies as there exists a number of categories where it is impossible to increase prices, particularly at the lower end.
RenCap however said; “We do not believe this is the case with Milo. We believe volume growth remains buoyant. Nestle indicated its volume growth exceeded 10% in FY13 despite declines in Maggi volumes in 1H13. The real challenge for Nestle in FY14 will be to pass potential currency driven input cost increases on. We therefore forecast further gross margin pressure in FY14”.
Although Nigeria has recorded continouos GDP growth for a decade, its effect is yet to be felt by the ordinary Nigerian, hence it has not led to a growing middle class. This may be responsible for a constrained consumer environment, which consumer companies lament.
Dwindling forex reserves and weaker currency, according to RenCap, may “result in interest rate hikes that could put pressure on Nestle’s distributors”. If this happens, volume of sales may decline.
Despite the decline, RenCap forecasts a profitable 2014 for Nestle based on the company’s infrastructural investment.
“We are forecasting an improvement in RoE and RoCE in FY14 following a period of declines on the back of the significant investment Nestle has made in infrastructure.
RenCap expects a bright future for Nestle and other consumer companies in Nigeria citing the strong GDP forecast for the country, a large market (due to its over 170 million population), and current low penetration of packaged food and beverages.