Nestle Nigeria Sees Margins Pressured as Inflation Weighs

LAGOS, Nigeria, Capital Markets in Africa: Nestle Nigeria Plc, a unit of the world’s biggest food company, will struggle to maintain profit-margin growth in 2016 as the highest inflation in nearly 11 years and a lack of foreign currency stalls the economy in Africa’s most populous country.

“We haven’t seen the bottom” of the downturn, Chief Executive Officer Dharnesh Gordhon, 51, said in an interview in the commercial capital, Lagos, on Aug. 10. A shortage of dollars has made it difficult to import raw materials, he said.

Nestle Nigeria, about 64 percent owned by Vevey, Switzerland-based Nestle SA, is seeking to use its market-leading position in the country to ride out an economic contraction of 1.8 percent this year, Nigeria’s first recession in three decades. The country, which vies with Angola as Africa’s biggest crude producer, has seen income plunge after the price of oil, which accounts for about 70 percent of government revenue, fell more than 50 percent over the past two years. Inflation accelerated to an annual rate of 16.5 percent in June.

The profit “margin is under pressure” as the company can’t pass all cost increases onto the consumer, Gordhon said.

While the Central Bank of Nigeria seeks to support the naira with currency controls, companies are finding dollar supply unpredictable, according to Gordhon. His company can go for as long as three weeks without being able to source dollars, he said.

“I wish there was a consistent pattern that you can plan with,” the CEO said.

Emerging Opportunities
Nestle Nigeria, which makes Maggi cube seasoning and Milo cocoa, is counting on an expanding middle class in the country and across Africa to increase and sustain demand for its packaged foods, the CEO said. It exports Maggi cubes to other African countries and to Europe, mainly to Nigerians living in those countries. While revenue grew 22 percent to 80.4 billion naira ($247 million) during the six months ending June 30 from the same period a year earlier, costs rose 28 percent, to 47.7 billion naira, Nestle Nigeria’s financial statement shows. Its Swiss parent company reports first-half earnings on Thursday.

“The Nigerian business for us is one of the best in Africa and it continues to grow,” Gordhon said. “We’ve had a compound annual growth of over 10 percent over the last five years. We’ve doubled the business in four years.”

With 92 percent of what the company sells produced locally, Nestle has an advantage over rivals that rely on imports, the CEO said. Rivals include Cadbury Nigeria Plc, Unilever Nigeria Plc and imported brands of packaged food.

‘Resilient Economy’
“What I see is that there will be few players and this gives us the opportunity to solidify our market position,” Gordhon said. “The market is shrinking in terms of total size of category, but our share is increasing.”

Nigeria’s economic downturn is likely to bottom out by the end of this year, with a turnaround set to begin in 2017, according to Gordhon. The naira has weakened 38 percent against the dollar since the central bank in June dropped a 16-month peg against the U.S. currency. The naira weakened 0.8 percent to a record low of 326.75 by 12:48 p.m. in Lagos on Wednesday.

“Nigeria is an extremely resilient economy,” he said. “People have gone through worse things in this country. What you need is constancy of economic policy or monetary policy. If you get those things, businesses can adjust. ”

Nestle plans to invest $80 million in Nigeria over the next three years. The country took about 70 percent of some $300 million the company injected in West and Central Africa in the past four years, according to Gordhon.

Source: Bloomberg Business News