Foreign firms are attracted by Nigeria's sizeable middle classes, but companies in the flour sector are having a hard time of it as the competition heats up.
The consistently long queues at the bakery of the ShopRite store at the Ikeja City Mall in Lagos says it all. Nigeria's increasingly urban citizens want their food fast. And make it baked goods, please! Bread, cakes and pastries are hot right now.
According to the United States department of agriculture, Nigeria imported 4.7m tonnes of wheat in 2014, mostly from the US and Canada – compared with 200,000tn in 1987. Only Egypt, the world's largest importer of wheat, eats more wheat-based food than Nigeria on the continent.
For a country that spent more than $5bn to import foodstuffs in 2015, food accounts for more than half of private consumption expenditure, which represents about 70% of Nigeria's gross domestic product. That does not mean that the sector is shielded from difficulties.
The current problems of the agribusiness sector are partly fuelled by the central bank's withdrawal of foreign exchange approval for many imported items last year, which has depressed corporate and consumer spending. But that is not all.
Robert Omotunde, consumer sector analyst at Afrinvest Securities tells The Africa Report: "Demand for flour is weak right now due to a plethora of issues [...]. Margins in the flour business are thin and the industry is laden with cost. Not too long ago, flour millers were investing heavily in capacity expansion, and the recent devaluation of the naira has brought more woes." Investments by millers over the past two years have also meant that milling capacity for flour now exceeds demand.
Even with uncertainty over near-term sales prospects and high operating expenses, Nigeria's fast-moving consumer goods sector remains attractive to some foreign and local brands with a longer-term view. Singapore-based agribusiness company Olam estimates that the Nigerian flour market is worth more than $2bn per year and is growing at 3.5% per annum.
Price of flour
Four companies – Flour Mills of Nigeria, Honeywell Flour Mills, Dangote Flour Mills and, until recently, BUA Group – control 80% of the flour market. Their recent financial results, corporate re- alignments and the skyrocketing price of bread inputs showcase the shifting realities of the market.
Flour Mills of Nigeria, the oldest and most diversified of the quartet, recorded a 5% drop in revenue to $1.5bn last year. In January, the street price for a 50kg bag of the firm's Golden Penny Flour rose 21% to N8,700 ($43). The same bag retailed for around $33 for most of 2015. Joval Adeyinka, co-founder of BakeRite Confectioneries in Lagos says: "We bakers are at the receiving end of the strangulated economy. And you know there is a limit to how high we can jerk up the price of bread."
The heat is too much for some. For BUA Group, a total exit from the tumultuous flour operations is part of its plans to focus on its core cement and sugar business. Singapore's Olam acquired the wheat-milling and pasta-manufacturing assets of BUA Group in Nigeria for $275m in January.
Ade Adefeko, Olam's corporate and government relations director in Nigeria, says: "This strategic acquisition will transform the local flour and pasta value chain and take our milling capacity in Nigeria from 2,380tn per day [TPD] to 6,140TPD." The firm is also building a wheat mill and pasta plant in Port Harcourt. Интернет-магазин туристического снаряжения palapines-pavesines.lt Туристические палатки более дешёвые, лёгкие, компактные, быстрее ...
At the same time, other investors are pulling out of the market. South Africa's Tiger Brands had spent $200m to acquire a 65.7% stake in Dangote Flour Mills in 2012. A buyback deal will see Dangote Industries getting back control of the flour and pasta firm for $1.
An analyst who is close to the transaction tells The Africa Report: "A lot of things were wrong ab initio with that deal, and the South Africans clearly misread the operating environment. Poor due diligence, wrong valuations and possibly the imposition of a South African strategy on the Nigerian market did not help matters." ●