A recent survey conducted by REACH Technologies, a Nigeria-based fintech, on behalf of FBNQuest, corroborates findings from the NBS COVID impact survey that consumers have fallen on harder times. We infer from the survey that Income levels are down by an average of 30% since March, while job opportunities are fast disappearing. Another sticking point is that consumption of non-essentials has been cut drastically. Respondents stated that they have reduced spending on higher value category items by c.22% since March. Although overall consumption has reduced since the pandemic started, the least spending cuts were made on food and health, which respondents viewed as most essential.
It is now becoming clear that the consumer goods sector is among the hardest hit by the economic crisis brought about by the COVID-19 pandemic. The fragility of household wallets has been laid bare, with statistics now pointing to even weaker consumer sentiments. The knock-on effect of fading demand and weaker oil prices are also stifling earnings of consumer goods companies. The market has responded sharply to these challenges by marking these companies down. Year-to-date, the consumer goods index is down -28% – the worst performing index, behind the broad market index’s -7%.
The consumer companies have also entered an exceptionally tough phase. Following the crude price collapse in March, accessing foreign exchange at higher interbank rates made obtaining raw materials more challenging. The companies are only able to obtain dollars at rates of around N360-390/US$ relative to N330-360/US$ pre-oil collapse. That aside, given that consumer wallets are under pressure, passing on price increases to combat heightened competition comes at a great cost. Among the publicly-listed companies, Q2 results – most of which will have been published by late July) – will reflect more of the COVID-related challenges, given that the lockdown took effect in late March. The other pressure point expected to be seen comes from FX losses booked by the listed companies in their financial statements as a result of the currency depreciation.
Essentially, information provided by REACH confirms that consumer sentiments have turned sourer, with only 3% of respondents claiming that they are benefiting from the pandemic. More recently, the VAT increase in February and an impending hike in electricity tariffs potentially tightens the squeeze on disposable incomes further. An acute downturn in spending is therefore increasingly likely this year. The IMF projects a GDP contraction 3.4% in 2020, while the labour ministry expects unemployment to rise to levels above 33.5% from 23% in Q3 2018 (last publication). Indeed, recent media reports are already pointing to job losses in key sectors.
A few sectors have gained considerable ground on the back of the pandemic. In this regard, the telecoms sector comes to mind considering that increases in remote communications and internet entertainment drove demand for data. The consumer goods sector in marked contrast finds itself in the unenviable position of being hit hard. That said, investors need to ensure that their consumer goods exposures are tilted in favour of companies like Nestle Nigeria, which has a proven track record of handling this level of pressure based on historical precedent.