By Niyi Jacobs
Nigeria, Africa’s largest economy, is currently grappling with two major economic challenges: foreign exchange (FX) exchange woes and inflationary pressures. These twin challenges are affecting every company operating in the country, from small and medium-sized enterprises (SMEs) to large multinationals.
The FX exchange woes are a result of the country’s struggling currency, the naira, which has lost significant value against major currencies such as the US dollar and the British pound. This has made it increasingly difficult for companies to access the foreign exchange they need to import raw materials, machinery, and other essential goods.
Inflationary pressures, on the other hand, are being driven by a combination of factors, including monetary policy, supply chain disruptions, and increasing demand for goods and services. The inflation rate in Nigeria has been steadily rising, reaching a 17-year high of 20.5% in August 2023.
One company that is feeling the pinch of these challenges is Nestle Nigeria, a leading food and beverage company in the country. In its Q1 2024 results, Nestle Nigeria reported a significant increase in revenue, but its gross profit margin declined due to rising costs.
The company’s revenue rose by 43.4% year-on-year (y/y) and 21.9% quarter-on-quarter (q/q) to N183.48 billion in Q1 2024, from N127.97 billion in Q1 2023 and N150.53 billion in Q4 2023. However, the cost of sales (adjusted for depreciation) increased significantly by 78.0% y/y to N132.49 billion in Q1 2024, from N74.41 billion in Q1 2023.
As a result of the rise in cost of sales, the company’s gross profit declined by 4.8% y/y to N51.00 billion in Q1 2024 from N53.56 billion in Q1 2023. The gross profit margin also declined by 14.1 percentage points to 27.8% in Q1 2024 from 41.9% in Q1 2023.
The company’s total operating expense (OPEX adjusted for depreciation) increased by 22.8% y/y to N27.20 billion in Q1 2024 from N22.15 billion in Q1 2023. This rise was largely driven by growth in administrative expenses (adjusted for depreciation) which soared to N7.74 billion (+151.0% y/y) in Q1 2024 compared with N3.08 billion in Q1 2023. Marketing and distribution expenses (adjusted for depreciation) grew marginally to N19.46 billion in Q1 2024 (+2.1% y/y) from N19.07 billion.
Despite these challenges, Nestle Nigeria remains committed to its investment in Nigeria and is exploring strategies to mitigate the impact of FX exchange woes and inflationary pressures on its operations. The company is also focusing on improving its operational efficiency and reducing costs to maintain its competitiveness in the market.
In conclusion, the FX exchange woes and inflationary pressures are a double whammy for Nigerian companies, affecting their ability to operate efficiently and maintain profitability. Nestle Nigeria’s Q1 2024 results are a testament to the challenges faced by companies operating in Nigeria, but the company’s commitment to its investment in the country and its strategies to mitigate these challenges are commendable.
