July 03, 2020 /11:09 AM / By CSL Research / Header Image Credit: Business Post Nigeria
Earlier in the week, the Petroleum Product Pricing Regulatory Agency (PPPRA) set the new band for petrol prices for July at N140.80 - N143.80/litre, representing a c.16% upward revision from the N121.50 - N123.50/litre band in June. The increase is in line with the agency's mandate for monthly review of petrol prices in line with the realities of the crude oil market. The news of the fuel price hike came on the heels of expected implementation of an electricity tariff hike in July. Although, news reports say the National Assembly are in talks with the DisCos to postpone the implementation, we expect it to still happen soon as it was a critical term in the agreement reached before Nigeria accessed the US$750m World Bank loan for the power sector.
The hikes in key consumer utilities (Fuel & Power) is a welcome development to keep both sectors in tune with market realities and drive efficiency. However, on the downside, these hikes will put further strain on already pressured consumer income. The global pandemic has led to many businesses cutting workforce or implementing steep salary cuts. Against this backdrop, unemployment level is expected to hit 34% by the end of 2020 from 23.1% reported in Q3 2018. In addition, we note that consumers are still reeling from abysmal growth in income, double-digit inflation and increase in VAT rate to 7.5% earlier in February 2020.
We believe the continued strain on consumer purchasing power will impact revenue of companies with very elastic product portfolios and presence of cheaper alternatives as we expect demand to decline. Based on our discussion with Unilever Nigeria (one of Nigeria's biggest FMCG players in the Food, Home, Personal and Kitchen Care segment), we understand that a new tier-4 consumer space is being created from the previous members of the tier-2 and tier-3 space whose purchasing power can no longer afford products in those tiers. Thus, Unilever is being forced to innovate and work towards reshuffling their product portfolio to sustain demand from this new category of consumers with the new radiant detergent brand being an example of a product in that category.
As the consumer purse gets more pressured, we expect some consumer focused businesses to begin to exit the Nigerian FMCG space. For example, Mr Price, a popular and fairly affordable clothing line in Nigeria has announced its exit from the Nigerian market. We think this might set the tone for the exit of several foreign brands from the Nigerian market given the recent devaluation of the naira has caused an increase in the shelf prices of their products.
Despite the odds, we remain optimistic on food focused companies as food products will take priority on the budget for consumers. However, consumer companies operating in the non-food FMCG businesses would have to innovate and create more affordable brands as the average Nigerian consumer is expected to become poorer given the bleak macro outlook.