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This article examines the legal implications of these financial losses, analyzing the potential causes, consequences, and strategic measures companies can adopt for recovery.
INTRODUCTION
The Nigerian Fast-Moving Consumer Goods (FMCG) sector has faced significant challenges in recent times, with many of the major ones reporting substantial losses in their financial reports. These setbacks follow closely on the heels of the financial difficulties experienced in 2023.
This article examines the legal implications of these financial losses, analyzing the potential causes, consequences, and strategic measures companies can adopt for recovery.
CAUSES OF FINANCIAL LOSSES
The current economic hardship can be directly linked to the removal of subsidies on petrol and increased electricity tariffs, coupled with the devaluation of the naira by the Nigerian government. These have significantly impacted FMCGs in the areas of:
a. Rising Operations Cost.
With the rising cost of production, driven by escalating expenses in transportation, logistics, power and raw materials, many FMCG companies are struggling to break even, especially as revenue remains stagnant. In some cases, even companies that have recorded increased revenue, still find their profitability margins in the negative due to soaring operational costs. As a result, companies are forced to either pass on the increased costs to consumers through price hikes, risking a decline in demand or absorb the losses and operate at a financial deficit.
b. Debt and debt servicing
In a bid to regulate the rising inflation, the Central Bank of Nigeria (CBN) has repeatedly increased the Monetary Policy Rate (MPR) over the past year, with the most recent hike to 27.50% announced on the 26th of November 2024 after the 298th MPC meeting, which marked the fifth increase in 2024. Since commercial banks use the MPR to determine their interest rates, this steady rise means higher borrowing costs for businesses, further straining the sector. The situation is exacerbated by the fact that many FMCG companies carry corporate debt denominated in foreign currencies. Nigeria alone spent $3.5 billion on servicing foreign debt in the first nine months of 2024, according to the CBN’s international payment statistics.
Compounding the issue of foreign denominated debt is the fact that this debt is currently being serviced at an exchange rate that has more than tripled.
c. Consumer behaviour and spending trends.
Nigerians continue to grapple with the rising inflation and its effect on the prices of goods and services and this is evident in the behaviour of consumers.
Recent trends reveal that consumers are purchasing less, with many prioritizing affordability over brand loyalty and in some cases even quality. This shift in consumer behaviour has led many brands to rebrand their products and services into smaller and more affordable forms, such as sachets, while maintain the same quality but at a reduced price.
Some industry experts believe some brands might instead focus on the preimmunization of their products to cater to the needs of high-end consumers who might not be as affected as the average consumer.
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Important Notice: The information contained in this Article is intended for general information purposes only and does not create a lawyer-client relationship. It is not intended as legal advice from Jackson, Etti, & Edu (JEE) or the individual author(s), nor intended as a substitute for legal advice on any specific subject matter. Detailed legal counsel should be sought prior to undertaking any legal matter. The information contained in this Article is current to the last update and may change. Last Update: October 1, 2024.
