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RenCap - Nigerian Consumer Sentiment Turning Positive in Fourth Quarter(AllAfrica Via Acquire Media NewsEdge) The fourth quarter of the year promises to be a clear departure from previous dispensations when consumer sentiment was dwarfed by certain economic factors unlike the emerging optimism over the anticipated rise in spending in the run up to 2015 general elections, reports Festus Akanbi Like every other sectors of the economy, manufacturers of household goods have been contending with what could pass for consumer apathy as a result of dwindling purchasing power and competing need of the Nigerian consumers over the years. The trend was confirmed in the latest inflation figure for the month of July released by the National Bureau of Statistics a fortnight ago, which showed a steady rise in the fifth consecutive month thereby posing a threat to price stability. Inflation was put at 8.3 per cent in July. The trend, according to financial affairs commentators, may encourage the Monetary Policy Committee (MPC) of the Central Bank of Nigeria to increase the cash reserve requirement (CRR) from 15 per cent to 18 per cent at its next meeting. Rebound of Consumer Sentiment In spite of this unfavourable scenario, however, economic analysts who took a deeper review of emerging statistics from the manufacturing sector predicted a rebound of consumers' sentiment going forward. This was the kernel of a twin-report by the International investment and financial advisory firm, Renaissance Capital, which presented a favourable outlook for manufacturers of consumer goods in the face of the anticipated favourable economic policies as the fourth quarter of the year begins. The reports-"Nigerian Consumers, Turning the Corner" and "Nigerian Consumer Companies Down but not Out, " at one breadth quoted Renaissance Capital's Sub-Saharan Africa Economist, Yvonne Mhango, predicting a rise in consumers' appetite while on the other hand, concerns were raised that the rising cost of sale and production could lower the companies' revenue projections. Mhango, in her report titled: "Nigerian consumer: Turning the corner, dated 8 September, sees consumer sentiment turning positive in (last quarter of 2014) 4Q14 for the first time since (First half of 2011) 1H11. Consumer sentiment refers to statistical measurement and economic indicator of the overall health of the economy as determined by consumer opinion. Consumer sentiment takes into account an individual's feelings towards his or her own current financial health, the health of the economy in the short term and the prospects for longer term economic growth. The report said Mhango has determined the macro variables that are correlated with the consumer confidence index and forecast the index using regression analysis premised on the company's macro projections. Her optimism was premised on the anticipation of stronger economic growth, lower interest rates, among others. "According to the report, we believe lower interest rates, stronger economic growth, moderately looser spending as the February 2015 elections approach, and moderately higher oil output are positive for consumer sentiment," the report said. This position, the report stated further, is supportive of what Nestle CFO, Martin Kruegel, said in the Nestle 1H14 conference call as he believed the consumer environment will improve marginally in second half of 2H14 on the back of increased government spending pre-election. The Optimism The optimism notwithstanding, experts expressed concern about the lack of trickle-down effect The report stated: "While we agree with our economist's view for a slightly more positive consumer environment from 4Q14, we believe that the Nigerian consumer will not reach its full potential while strong GDP growth does not translate into increased wealth at the bottom of the pyramid. We believe this is due to slow progress on infrastructure development, particularly with regard to power, and alleged corruption at some levels of government." Going into details on its projection, Rencap said in the report that, "We believe the prospect of lower interest rates, stronger economic growth, moderately looser spending as the February 2015 elections approach, and potentially higher oil output, may turn consumer sentiment positive from 4Q14." It recalled that in 1Q12, when consumer confidence was at its (recent) lowest, the policy rate had been hiked by 4.5 percentage points over a period of 12 months , and year-on-year growth had slowed to 3.5 per cent vs 6.9 per cent in 1Q11. "Fast forward two years and growth has strengthened to 6.2 per cent (in 1Q14). Oil output has stabilised, following several months of decline, and we think there is potential for it to further improve, which implies possible upside for economic growth. Moreover, we expect some pick-up in election-related fiscal spending, albeit moderate, which would also be growth-positive. The positive correlations between the revenues of Cadbury Nigeria, Nestle Food Nigeria and Nigerian Breweries, , and the Federal Government of Nigeria' s (FGN) wage bill, suggest to us that a wage hike implies an improvement in consumer sentiment. If the FGN did lift wages by a significant amount (against our expectations), this would have a large positive effect on revenues at consumer companies. Based on our macro outlook, we project an increase in the confidence index to 3.4 in 4Q14 vs. -4.6 i n 4Q13. Thereafter we expect confidence to moderate to 1.6 at year and of 2015 YE15." Interest Rates Relying on the pledge of the financial authorities to halt upward drift of interest rates, the report stated: "In spite of Nigeria's households being underleveraged, we found consumer confidence to have a negative linear relationship with the prime lending rate. We think this is in part because a higher lending rate implies an increase in companies' cost of capital, which could be passed onto the consumer, especially where the good or service is price inelastic. The lending rate decreased by 50 basis points in 1H14 to 16.5 per cent. Our base case is that interest rates will remain flat over the short term. Beyond the elections we think there is scope for a further moderation of rates, assuming prices remain stable. We expect consumer sentiment to improve in such an environment." For a government which has shown resolve to stick to a moderately loose fiscal policy, the report said there is a connection between government's wage bill and Consumer confidence. It maintained that an increase (decrease) in the wage bill is associated with an increase (decrease) in consumer confidence. "This association between the FGN wage bill and consumer confidence is unsurprising, given that the government is Nigeria's biggest employer. This implies that any changes in the government's wage bill will have a pronounced effect on Nigeria's consumer behaviour. "Fiscal policy has been conservative under this administration, as indicated by the narrowing of the federal budget deficit to 1.8 per cent of GDP in FY13, from 3.3 per cent in the last year of the previous administration. For this reason, we expect any pre-election wage increases to be moderate. And we believe there is room for spending to pick up in FY15, following the cosmetic narrowing of the budget deficit. We thus expect an associated improvement in consumer sentiment," the report said. High Cost of Selling and Distribution In economics, there is correlation between rising consumer sentiments and a corresponding increase in income of products manufacturers. But far more than the rising appetite of consumers, the report indicated increased investment in selling and distribution costs incurred by the affected companies in the period under review. It said: "All companies reported increases in selling and distribution costs in 1H14 greater than their revenue growth. In our view this is a combination of increased investment in selling and distribution, and revenue growth falling short of most companies' targets. Given the constrained consumer environment, it is necessary to convince the consumer to buy a particular product. In addition, haulage and transporters' fees have increased significantly. "Nestle reported a 22 per cent increase in marketing and distribution fees in FY13 and a 17 per cent increase in marketing, distribution and admin fees in 1H14. At just short of 22 per cent, we believe this is at a sustainable level. Unilever has stated publicly that it is in the process of increasing its advertising, marketing and promotion (AMP) costs to 10 per cent of revenue from 6.5 per cent in FY12. Hence the company's 18 per cent increase in admin fees in FY13 and the 28 per cent increase in selling, general and admin in 1H14. At 28 per cent of turnover this is considerably higher than Nestle's. Cadbury reported a 17 per cent increase in sales, marketing and distribution expenses in FY13 and in contrast to other companies has reported a 3 per cent decline in sales, marketing, distribution, admin and other expenses in 1H14, but then it did report a 12 per cent decline in revenue. This is currently sitting at 26 per cent of revenue. "GSK reported a 36 per cent increase in selling and distribution costs in 1H14. According to the company, this is due to a significant increase in haulage and transporter costs. As the smallest of the four companies GSK relies more heavily on third-party transporters," the report stated. Adjusting the Price But does this positive outlook in terms of consumer sentiment naturally translate to upward price adjustment? The reports said it is not likely going to happen, saying pricing remains a key issue in the consumer environment at present and increasing prices on certain products is practically impossible. "In our view, denominations are a major challenge in upping prices. We believe this is largely a structural issue. Prices are rounded to N10, N50 or N100 due to the denominations in naira and the lack of small change. Therefore in many cases, price increases cannot occur without a step-change in pricing. For example, an increase in the price of stock cubes would have to be from the current N10 to N20. In larger sized products such as Milo, a price increase from N750 to N800 would be easier to achieve," the report said, noting however that, "We found that selling prices in Nigeria are similar to prices in South Africa (SA) and we believe it will therefore be necessary to increase prices in the not too distant future." Copyright This Day. Distributed by AllAfrica Global Media (allAfrica.com). |