These are not the best of times for operators in the food and beverage manufacturing sub-sector. Consumers’ dwindling purchasing power, forced by the prevailing harsh economic environment, is seriously affecting their profitability and competitiveness. Decrepit road infrastructure, particularly the Apapa, Lagos gridlock, has added to the plethora of challenges holding the food industry down. Many of the operators, especially the small and medium scale, who could not stand the heat, have closed shop. Assistant Editor OKWY IROEGBU-CHIKEZIE reports.
Operators in the food and beverage manufacturing sub-sector are struggling. The weight of economic headwinds tossed on their path by the prevailing harsh economic environment appears to have been too heavy for them to bear.
From the big operators such as Dangote Group, Flour Mills of Nigeria, and Honeywell Flour Mills, down to the small and medium scale operators, it is the same story of woes.
For instance, many of the operators, big and small, The Nation learnt, are yet to come to terms with the reality of the declining purchasing power of consumers, which has affected sales volume and ultimately, the bottom line.
The nation’s decrepit road and power infrastructure, the perceived government’s failure to curb smuggling, and insecurity in the Northeast, among others, are also threatening to force the sub-sector to its knees.
As if these are not enough to throw operators in the sub-sector into confusion, Nigeria’s tariff system, which does not support manufacturing, but encourages importation, is said to have dealt a severe blow to the sector.
Added to these are the prevailing exchange rate instability, monetary and fiscal policy issues, as well as the transport sector’s lack of capacity to invest in quality trucks for movement of goods and services.
An Executive Director in one of the Flour Mills Companies, Mr. Marcus Adiele, echoed the collective frustrations of operators in the food and beverage manufacturing sub-sector when he said, for instance, that the problem of logistics caused by bad road infrastructure was negatively affecting their operations.
He was emphatic that the flour companies are struggling. According to him, apart from Dangote Flour Mills, which relies on the parent company’s transport unit for its transportation needs, the transport sector lacks capacity to invest in quality trucks for movement of goods and services.
Even if the required investment in quality trucks were there, the seemingly intractable traffic gridlock in and around the Apapa, Lagos Ports would have still been a thorn in their flesh. At the moment, all the access roads leading the nation’s premier port in Apapa are in deplorable condition, forcing road users to spend days and weeks in the traffic.
An investor and administrator, Chief Dawodu Ajisafe, put it in perspective when he said: “Logistics issues, especially the worsening road network at Apapa, a major business hub, impact negatively on the ability to supply raw materials to factories outside Lagos and finished products to the Lagos area customers.”
Honeywell Plc was one of those badly hit by the crisis. The company’s poor first quarter result, The Nation learnt, was partly because of the dilapidated road infrastructure and chaotic traffic situation in and around the nation’s premier port in Apapa, which has virtually crippled business activities in that axis.
The situation was said to have made it extremely difficult and expensive for the company to transport goods out of its factory in TinCan Island. The situation also resulted into an increase in freight cost to about 25 per cent.
LCCI laments
The President, Lagos Chamber of Commerce & Industry (LCCI), Mr. Babatunde Ruwase, said the gridlock in the Apapa axis of Lagos State has imposed and continued to impose unbearable cost on businesses. He said the dysfunctional state of the ports and associated logistics for cargo clearing has become a nightmare.
Ruwase described the cost to business as horrendous. This, he said, include the astronomical increase in haulage cost, increased interest cost (borrowed fund) used for import transaction, high demurrage charges, and high insurance premium of vessels coming to Nigeria.
He listed other costs to include high shipping cost, low capacity utilisation due to problem of access to raw materials from the port, as well as traffic congestion which has extended to the metropolis from the ports, paralysing economic activities in the area and many more.
“What we are witnessing today is a reflection of the several years of neglect of our ports and other infrastructure,” Ruwase stated, adding, however, that the Chamber appreciates the government’s recent interventions in the bid to solve the Apapa traffic gridlock.
The LCCI chief specifically said the Chamber appreciates the recent intervention by Vice President Yemi Osinbajo and Lagos State Governor Mr. Akinwunmi Ambode and the decision of the Federal Executive Council to award a N72 billion contract to fix the road leading from the Lagos ports to the toll gate.
Ruwase, who commended this move, urged that it be followed through to completion.
He reiterated that these measures need to be holistic, decisive, consistent and sustainable.
He also said there is the need to work on the rail system and expand the capacity of the ports. Besides, the pipelines for the transportation of petroleum products need to be made functional, and the tank farms need to be better dispersed.
Ruwase said it was regrettable that Lagos ports, which are major sources of Customs revenue, had to suffer the kind of deterioration and challenges that are currently taking place.
Indeed, the poor road infrastructure in the troubled Apapa axis of the ports has become a hard nut to crack for the government and port users. Many companies, which either operate from the area or rely on the roads to take delivery of imports and distribute their products, have been screaming blue murder.
A sector weighed down by smuggling
To the President of the National Union of Food, Beverage and Tobacco Employees (NUFBTE), Mr. Lateef Oyelekan, smuggling is perhaps, the worst challenge staring operators in the food industry in the face. He said smuggling in the Northern part of Nigeria and the Seme axis of the Nigerian border with Benin Republic, has refused to abate.
Despite the ban on the importation of flour-based products like noodles and spaghetti, smuggled products still find their way to the shelf of many markets and stores in across the country. A visit to Balogun Market (Trade Fair Complex) confirmed this. For instance, Bonita, which is a variety of spaghetti, is the toast of buyers, especially for those cooking for sale.
However, Bonita, The Nation reliably gathered, is smuggled through the Seme border, with the security agents allegedly turning blind eye to the activities of the smugglers of the product into the country through the numerous porous borders.
Visits to various markets within Lagos also indicated the abundance of sub-standard imported and smuggled flour based products, which continuously erode the market share and profitability of the domestic producers.
An expert, Kehinde Aluko, said any Nigerian caught smuggling or importing substandard products into the country should be seriously dealt with. “Increasing the tariff on imported products is another way of reducing importation of these products.
“This will discourage importation of goods generally and promote the growth of infant industries in the country,” he said, adding that these policies will also boost the country’s external reserves as the country will export than import.
Continuing, Aluko said: “A multi-dimensional approach would be necessary to tackle the problem of substandard goods into the country. The government should set up a task force specially to monitor the activities of the Nigeria Customs Service and the borders as well.
“I also believe that if the Federal Government solves the problem of power supply, more manufacturing companies would thrive because it would provide ample opportunity for indigenous brands to showcase quality goods. Nigerians can produce just about anything if the enabling environment is provided.”
Declining purchasing power is sore point
Nigeria may have exited recession, but the effects of the general economic downturn are still being felt by operators in various sectors, particularly those in the food and beverage sub-sector. The sub-sector appears to be facing the most dangerous headwinds, manifesting in the form of dwindling purchasing power of consumers.
Latest statistics showed that the economy grew by 1.5 per cent year-on-year in the second quarter of 2018, slowing from a 1.9 per cent expansion in the prior period. It is said to be the weakest growth rate since the third quarter of last year, as oil output shrank while non-oil sector continued to rise.
According to analysts at Financial Derivatives Company, the harsh economic environment has led to dwindling purchasing power among consumers, with a decline in consumer confidence, which forced the Consumer Confidence Index (CCI) down to 60 points in the third quarter of this year.
With the purchasing power of consumers largely decimated, the volume of sales by operators in the food and beverage sub-sector also nosedived. Decreasing sales also affected operators’ bottom line.
The fact that some of the flour mills are still in business is because of the various growth strategies initiated by the management to mitigate the effect of the bad economy on their business.
The operators are also affected by inadequate electricity supply. Worst affected are the Small and Medium Enterprise (SMEs) many of which are said to have closed shops because of inadequate electricity supply. Many of them lack the required capital to buy and service generators.
Ajisafe lamented that economic distortions and government’s inability to fix critical infrastructure such as power and roads are eroding the profitability of operators in the food business. He added that distortions in the nation’s monetary and fiscal policies are also eating deep into the operators’ bottom line.
He also said increase in the international price of wheat, which is the flour companies’ major raw material, combined with slight devaluation in the official foreign exchange market are putting pressure on the companies’ margins, because it is not all the cost that could not be passed on to customers.
Ajisafe also pointed out that in the last few months, there has been a noticeable drop in the demand for flour products, largely due to the availability of cheaper agricultural produce and the slowdown in economic activities as a result of the upcoming general elections.
Besides, there has been an influx of foreign pasta products, which are available at lower prices. This, according to Ajisafe, brings back the issue of appropriate tariff.
Bad as the situation appears, operators and stakeholders in the sub-sector are, however, upbeat that things will turn around with the expected completion of the Apapa road project before the end of 2019.
They are also hopeful that stability in the international price of wheat and seasonal improvement in flour products demand and the conclusion of the 2019 elections are signals that a new dawn may soon come the way of the troubled sub-sector.
