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Multinational firms in the Fast Moving Consumer Goods subsector may exit the country this year if the operating environment does not improve, according to a new report by a financial solutions firm, Cardinal Stone.
The report, titled ‘Strategic Resilience: Sailing Through
Business Disruptions’, said high operating costs would persist for firms
operating in the Fast Moving Consumer Goods sector.
According to the report, the FMCG sector remains heavily
exposed to changes in commodity prices, exchange rates, import and clearing
duties, and freight costs.
It noted that FMCGs might not benefit from the moderation in
global commodity prices because of the significant depreciation of naira, which
weakened from N422.00/$ in June 2023 to N951.94/$ in December 2023, after the
Central Bank of Nigeria floated the country’s exchange rate.
The CBN floated the exchange rate in June 2023 to bridge the
gap between the official rate and the alternative market and address the
challenge of forex scarcity that the country has been grappling with.
The report read in part, “In 2024, we expect companies to
continue to re-imagine their operational strategies to achieve cost efficiency.
“We also see legroom for more collaboration between FMCGs to
boost economies of scale, product portfolio diversification, revenue and cost
synergies, technological innovations, and financial power of the resultant
entity.
“The alternative path may eventually degenerate to exit from
the operating environment or high-cost segments, similar to the cases with
Procter and Gamble, GSK, Pernord Ricord, and Unilever.”
It added that weaker currency could spike diesel costs, as
was the case in the first half of 2023, which saw diesel prices soar to a new
high of N1,004.98 per litre in the second half of 2023.
The report further tipped the drag from higher energy costs
to extend into 2024, barring a shock in naira appreciation.
“Similarly, borrowings could be elevated on the combined
impact of dollar-denominated debts that could spike when translated to naira
and the surge in naira values of operating and machinery costs that are
targeted to be funded with foreign currencies.
“The knock-on effect of these changes could translate to an
increase in effective interest rates,” the report added.
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