Nigeria: Consumer goods draw investors

If any sector has come to symbolise Nigeria's attractiveness as a frontier market in recent years it is consumer goods.

Consider the instant noodle. In 2008, Nigerians ate 1.4bn packets of them, according to the World Instant Noodle Association. Last year that figure grew to 1.9bn - more than 10 packs for each of the 173m Nigerians.

Beer is another example. Diageo sells more Guinness in Nigeria than in any other nation, including Ireland. Heineken has built its biggest brewery outside Europe here.

Beer sales have grown at nearly 10 per cent a year for a decade, the Dutch company says.

Yet there is still big potential to expand. Average per capita consumption of beer is still relatively low at about 10 litres a year, compared to 60 litres in South Africa, the continent's biggest market, and nearly 80 litres in the US. Also, the population is young, increasingly urbanised and growing at 2.8 per cent, or nearly 5m people, a year, trends that make marketers salivate.

Given these numbers, and the reduced opportunity for high returns in the developed world and Brics countries since the 2008 financial crisis, it is no surprise that international companies and fund managers have been eager to put money into the fast-moving consumer goods (FMCG) sector in Nigeria.

At a corporate level, South African businesses have led the way.

In 2012, Tiger Brands, South Africa's largest food company, purchased 63 per cent of Dangote Flour Mills, which processes and markets flour, and also produces pasta and noodles. It is not the biggest noodle producer, however: that honour goes to Dufil Prima Foods, which has a 70 per cent share of the market.

Tiger Brands also has a 49 per cent stake in the food operations of the conglomerate UAC. In September, UAC sold a similar size stake in its restaurant businesses, which includes the Mr Biggs chain, to another South African-listed company, Famous Brands.

For international fund managers interested in the sector, the Nigerian Stock Exchange has offered a way in, through the listed local subsidiaries of foreign parents.

Since consumer goods companies - along with banking stocks - are the most liquid of the shares in Nigeria, they also attract inflows from investors seeking general exposure to the Nigerian market. The result has been soaring share prices.

Even after a dip in recent months, Unilever Nigeria is up 63 per cent over the past year, PZ Cussons 48 per cent, Nestle Nigeria 75 per cent and GSK Nigeria 97 per cent. Analysts have warned that a bubble may be developing in the FMCG share market.

Binta Drave, who covers Nigerian consumer stocks for Exotix, the frontier market boutique investment bank, points out that even as the stock prices have been shooting upwards, earnings growth has been slowing for some FMCG companies.

The partial removal of the fuel subsidy in 2012 has cut disposable income for many Nigerians, Ms Drave says. Customers have been switching to lower-cost brands, instead of the more expensive products marketed by the big FMCG companies.

In addition, the insurgency by the Boko Haram Islamist group has made it much more difficult for companies to distribute and sell their products in northern Nigeria, where about half of the population lives.

Recent earnings reports bear this out. Cadbury Nigeria, for example, saw its revenue rise by just 8.3 per cent in the first half of 2013, compared with the same period the year before. Turnover at Nigerian Breweries, which is owned by Heineken, was up 7.4 per cent in the first half of the year. That is less than the inflation rate, which was 8.7 per cent in July.

Investors in Nigeria would generally expect only be happy with growth of 15 to 20 per cent, to cover inflation and country risk, as was the case before 2012, says Ms Drave, adding that "broadly speaking, we take a negative position on consumer shares for now".

She adds: "There is modest growth, but many companies still have price/earnings valuations of 30 or 40, so what is the incentive to buy at this time? It is not as if investors are tied to Nigeria. They can put their money elsewhere in Africa or into other frontier markets."

Still, the long-term prospects for the sector still look good. Gapuma, a UK-based commodities and procurement company, has an office in Nigeria, and imports ethanol for drinks manufacture, chemicals for household detergents and steel for home building.

Shahab Mossavat, a former trader who now heads Gapuma's marketing department, says that the informal economy in Nigeria is not captured by the official statistics, so the consumer market is bigger than it appears.

"At the top end, the economy has slowed a bit, especially in construction," he says. "But at the bottom end, there's a great equalisation going on, and the poor are starting to see more benefits of the market economy.

"For them, things like branded soap and shampoo are becoming normal, regular purchases."

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