Nigerian Food & Drink Industry: Thriving Amid Uncertainties

Growth in the consumer sector has been a bright spot in Nigeria's economy, with many of the fastest-growing industries focused on the country's rapidly growing private consumer demand. Thanks to a very large population (more than 160m in 2011 growing at 2.5% annually) and a rising retail sales growth.

Despite a positive overall outlook, consumption has been somewhat constrained towards the beginning of 2012. Inflation has risen significantly from 10.9% in December 2011 to 12.9% in June 2012 on the back of the removal of fuel subsidies. The price of fuel for transport and power (many Nigerians depend on standalone generators) has risen sharply, eroding the purchasing power of many consumers. Trickle down effects have already started to increase prices in other sectors. Apart from the direct impact of the fuel subsidy removal on prices, the recent 20% increase of tariff on major staple foods such as rice and flour is also putting pressure on inflation. It is believed that these disruptions will subside with time, and domestic demand in 2012 will sustain its upward trend.

Food Consumption

  • Food consumption compound annual growth in Naira to 2014: 12.7%
  • Per capita food consumption compound annual growth in Naira to 2014: 10.4%

Driven by an impressive headline economic outlook, food consumption is expected to grow very strongly over the next few years from a low base, with private consumption expected to play an increasingly important role in growing Nigeria’s economy (and subsequently boosting food consumption) over the next few years. With a population of around 160m, an underdeveloped food and drink industry and a strong macroeconomic outlook, Nigeria has the potential to be Sub-Saharan Africa’s most dynamic long-term consumer story. However, for the time being, much of the consumer base is still largely unreachable. On the medium to long-term, GDP growth over the long term should steadily increase consumer spending power and filter through to even greater food consumption. The development of the mass grocery retail (MGR) industry will also contribute to greater food consumption among urban residents as it provides a more organised and efficient market for the sale of food and drink products. Yet the reality remains that the spending patterns of most consumers, particularly outside the main urban centres, is unlikely to change dramatically for the foreseeable future.

Alcoholic Drinks - Beer

  • Beer volume sales compound annual growth to 2014: 7.3%
  • Beer value sales compound annual growth to 2014: 13.3%

Beer is expected to perform very well over the next few years as the strong economy provides momentum to the industry.  According to BOS, per capita consumption in Nigeria currently stand at about 10 litres, which although higher than a number of markets in East and Southern Africa, remains well off the 25 litres consumed in Cameroon and the 60 litres in South Africa. Consumption per head has more than doubled in Nigeria since 2002 in spite of strong population growth (which places downward pressure on per capita consumption), as incomes have risen and most importantly significant investment into beer by Diageo and Heineken in particular has poured in. Both have largely focused on the premium market. Nigeria has arguably yet to see the low-cost beer revolution pioneered by SABMillerin East and Central Africa. By 2016, it is expected that per capita consumption will grow to about 10 litres. On a value sales basis, strong disposable income growth will clearly play into Diageo and Heineken’s relatively high-spending target market. According to BMI Africa team’s bullish view on the Nigerian economy, per capita GDP growth to more than US$7,000 by 2020 will likely present a huge rewards for beer produces in Nigeria.

Soft Drinks -Carbonates

  • Carbonates volume sales compound annual growth to 2014: 5.9%
  • Carbonates value sales compound annual growth to 2014: 11.9%

Like beer, the carbonates industry is expected to benefit considerably from the strong economy. Across Nigeria, carbonates sales typically benefit largely from strong economic growth. Carbonates double up as both affordable luxuries and essential thirst quenchers (although the meteoric rise of bottled water across Nigeria in recent years has dented this), and they have a widespread presence across Nigeria where internal trade systems are notoriously weak. By 2016, it is expected that per capita consumption of carbonates will grow from about 5 litres in 2010 to about 7 litres. Economic momentum and ongoing investment by the franchise bottler of PepsiCo and the Nigerian subsidiary of the core Coca-Cola bottler Coca-Cola Hellenic into marketing and distribution will bedrock headline volume and growth over the next five years.

Mass Grocery Retail

  • Supermarket sales compound annual growth to 2014: 24.0%

Nigeria, with a large and growing population of around 160m makes it arguably the most promising retail market in African. Notwithstanding, the country carries greater risk than more relatively modestly sized (in terms of population) regional growth stories such as Ghana, where operating costs are lower and institutions are better developed. Yet its raw growth potential is unmatched. South Africa’s Shoprite (Africa’s largest retailer by market capitalisation) is present in Nigeria and operates only about 5 stores across major cities. As a comparison, it runs 16 stores in Zambia (population less than 13m).

Nigerian mass grocery retail sales are set to grow immensely off a very low base over the next few years taking into account that trade now  accounts for about 19% of the country’s GDP from less than   9% a decade ago.

High operating costs and weak internal trade systems are two core reasons why we think international retailers have looked at Nigeria rather hesitantly. Additionally, the West Africa region in general lacks a strong regional grocery retailer, unlike in Southern Africa where well-established South African and Kenyan retailers in particular are able to launch in neighbouring markets. At this stage, most retail investment into Nigeria are targeting the high income minority. The organised retail industry arguably lacks the scale to go down any other route at this stage of its development. Moreover, it will probably take a number of years for Nigeria’s food-processing industry to develop to an extent that retailers can stock a high proportion of cheaper domestically produced goods, which are likely to be pivotal in pulling in low-income traffic over the long term.

Bottled Water

  • Bottled water volume sales annual growth over the last 10 years: 31%

Nigeria’s bottled water industry has grown phenomenally over the past decade, with volume sales growing at an annual rate of 31% between 2002 and now. The market accommodates both multinationals, large local corporate and thousands of SMEs across the country. To 2016, per capita consumption BMI analysts expect to growth to hit about 8.5 litres per capita. Over this period, bottled water is expected to comfortably surpass carbonates as the most widely consumed soft drinks segment by volume. On the value side, the outlook is equally strong as alternative source of drinking water across the country remains elusive. Hot weather, growing population and health consideration will continue to drive the dynamics bottled water demand and we expect the sub-sector to become more segmented as competition grows and consumers’ tastes and preferences evolve.

MULTINATIONAL CORPORATIONS -SETTING THE PACE

Nestlé and Unilever are leading the way in food and fast-moving consumer goods. With incomes in Nigeria and the wider Sub-Saharan Africa region increasing and more people able to afford Nestlé’s and Unilever’s brands, there is a lot of room for growth. In reality, only the surface of this potential has been scratched. Nestlé, for which Africa accounts for only about 3% of global sales, is planning to spend nearly US$1.5 billion in capacity expansion to grow its business in Africa over the next few years to 2015. And while Walmart’s acquisition of Massmart earlier in 2011 was about entering the South Africa market, there is definitely a strong regional angle to it, too. On a smaller scale, the UK-based asset management firm Silk Invest epitomizes a new breed of investor. It is planning to launch a private equity fund in excess of US$200mn targeting food and drink processing companies in particular. It is believed that Silk will look to put equity capital into end-processing companies such as biscuit and drinks producers. Silk is believed to be targeting firms in Ghana, Kenya and Nigeria among other countries.

GOOD NEWS ALL THE WAY

Bridging the Gap between Farm and Market: Dutch retail group SPAR International's Nigerian subsidiary, Spar Nigeria, is planning to develop direct business relationships with farmers in order to provide consumers with fresh farm produce at local market rates. The company is looking to launch about 200 outlets by 2015. The plans are part of the company's strategy to ensure that its customers have access to farm-level freshness at local market prices. In the June edition of FinIntell, we reported that that one of the major problem confronting Hotel business in Nigeria is their inability to source food products locally due to bad road making it difficult for farm produces to reach the hotels in good condition. With SPAR Nigeria potential investment into distribution of fresh farm produce in Nigeria, we hope to see a major improvement such as standardisation, availability, packaging and fare pricing in the subsector.

Fresh Battle in Non Carbonates Soft Drinks: Soft drink producers are increasingly focusing their attention on the noncarbonated sector as carbonates are increasingly impacted by increasing health-consciousness. This trend is evident in both developed and emerging market. For instance, in the first quarter of this year, Aje Thai, the Thai bottler of  Big Cola soft drinks, decided to adjust two of its soft drink production lines in Thai province Chonburi to produce bottled water under its Cielo brand. In India, carbonates beverage segment has served as a key battleground between PepsiCo and Coca-Cola, their market share battle is quickly extending into the non-carbonates drinks market. Although the low purchasing power of Nigerian consumers means that the lower-value carbonates are likely to remain the beverage of choice for most consumers, growing consumer affluence and an emerging shift of consumer awareness towards health consciousness are quickly fuelling demand for non-carbonates such as fruit juices and functional beverages.

Supportive Government Legislation: The key trend affecting global food and drink sector is the ongoing introduction of government legislation to reduce consumption of unhealthy food and drink products. In the last one year, the main developments in this area have been introduction of a tax on carbonated soft drinks in France and reintroduced proposals for minimum alcohol pricing in Scotland. In France VAT on soft drinks with added sugar rose from 5.5% to 19.6% as of January 1, 2012, which could have a significant impact on volumes in the market.  In USA, there is a growing campaign among government and welfare organisations to discourage consumers from fatty foods. With average weight put at 80kg in the USA relative to 56% average weight in Asia, we feel that legislations against unhealthy food and drinks will likely extend to different boarders.

Focus on Natural sweeteners: On the flip side of the coin, there is an emerging opportunity with sweeteners derived from the Stevia plant finally being formally approved for use by the European Commission. The move came into force in December 2011 and could pave the way for a host of new product launches containing the ingredient. Stevia's main advantage over other low-calorie sweeteners is the fact that it can be labelled as completely natural – an attribute that has already helped the product gain market share in the US and Asia. However, while the product's natural origins clearly chime with current trends within the food and drink sector, there are still challenges in the areas of taste and consumer awareness that need to be overcome.

Our Forecast

  • With a rapidly increasing population that currently stands at about 160mn, Nigeria possesses a potentially dynamic consumer story.
  • Rising spending power of the middle class will boost the food industry.
  • Nigeria produces a number of key agricultural crops locally and is the world’s fourth largest cocoa grower.
  • Per capita food consumption is expected to grow strongly over the coming years.
  • Investment into the highly underdeveloped mass grocery retail industry will increase
  • The wealthiest Nigerians will continue to fill their baskets with the most expensive goods.
  • Beverage companies will continue to invest in diversification away from carbonated beverages and into healthier sub-sectors
  • Private equity companies will take a greater interest in emerging market consumer assets
  • Companies with strong Emerging Market exposure will continue to outperform
  • Multinationals will increasingly pursue frontier market investments
  • Investment in innovation will increase as producers seek differentiation; emphasis will be placed on protecting innovations.
  • Some consumer goods manufacturers will continue to leave sectors under threat from private labels while others will calibrate their portfolios toward private labels to capitalise on their growing demand
  • With consumption standing at just 10 litres per capita per annum, the beer industry has merely scratched the surface of its potential.
  • Government legislation will potentially play an increasing role in marginalising unhealthy food and beverage products through enlightens and consumer education.
  • Demand to shop continently for fresh food and drinks will continue to grow in tandem with increasing the economic opportunities of female work force.
  • Nigeria’s beer industry is rapidly developing and is arguably Africa’s most promising. Led by low-cost carbonates, soft drinks sales are increasing steadily.

The Threats

  • Developed markets are still feeling the pinch of global financial crisis with economic weakness and political uncertainty weighing on private and public spending
  • The value theme is still very important across Nigeria with inherent price consciousness and lean  wallets
  • Per capita food consumption remains very low for processed and packaged food.
  • Nigeria’s regulatory and business environment remains largely unsupportive.
  • Due to infrastructural inadequacies and particularly low incomes, much of the rural consumer base remains out of reach for most food companies.
  • Local producers will continue to source a significant proportion of their inputs abroad leading to high production cost and increasing the price of finished goods.
  • Competition from regional countries with better business environments, such as Ghana, could see Nigeria lose out on foreign direct investment.
  • Producers will struggle to maintain their profit margins in the face of rising key commodity costs paired with a highly price-conscious consumer base.
  • Nigerian consumers are becoming more brands conscious and interested in new products. This will keep players on their toes as investment in research and innovation will remain paramount.
  • A number of major producers are already present in the water, juice, soft and alcoholic drinks markets, making competition pricing and promotion more intense.
  • Despite encouraging growth, per capita soft and alcoholic drinks consumption remains low.
  • Although the trend is less pronounced than in more developed economies, economic weakness is affecting near-term growth of the beer industry across major markets.
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