Dairy leads Nigerian food sector with N347bn revenue

NIGERIA – The dairy sector has emerged the second largest segment in the food and beverage industry in Nigeria with estimated revenue of N347 billion in 2013 and an estimated compounded annual growth rate (CAGR) of 8 per cent over the last three years.

A report by Agusto & Co. revealed that the milk segment is the largest in the industry and accounts for an estimated 61 per cent of the industry’s turnover.

The Nigerian dairy industry consists of six major market segments: Milk, Yoghurt, Cheese, Ice Cream, Butter and Infant Formula.

The report showed that the dairy industry has consistently exhibited oligopolistic characteristics with only a few dominant firms.

FrieslandCampina remains the market leader with an estimated 30 per cent share of the Industry’s revenue; almost double that of its closest competitor. 

Other dominant firms include Promasidor Nigeria Limited, Nestlé Nigeria Plc and PZ Nutricima. Operators in the Industry have extensive distribution channels, strong foreign partnerships and enjoy strong product demand”, the report added.

Agusto & Co however noted that the industry is susceptible to the volatility in the price of raw milk powder, adverse movements in exchange rates, poor infrastructure and inconsistencies in government policies.

The report further revealed there is a wide gap between the harvested milk (local supply) in Nigeria and demand, which has resulted in a substantial importation of milk.

The report added: In 2013, demand for milk was estimated at 1.7 million tonnes, about 1.2 million tonnes in excess of domestic supply, which was estimated at 591,470 tonnes. Imported milk powder accounts for over 75 per cent of the Industry’s input.

The short shelf-life of milk and the absence of the required infrastructure to operate cold supply chain make it difficult to distribute fresh milk in commercial quantities, thus, limiting the development of local dairy farming.

“Contrary to international practice, Nigerian dairy processors either import and repackage milk powders for sale or reconstitute imported milk powders into liquid milk and other forms of dairy products such as yoghurt and ice cream.

We expect the Industry to remain dependent on imported milk powder in the medium to long term as domestic milk production capacity continues to remain lower than demand, “it stated.

The report noted that in 2013, the record high price of raw milk powder significantly affected the Industry’s operating costs and consequently profits.”

The rating agency also found that increased capital expenditure and demand for dairy products translated into growth in production volumes and turnover. 

It said the Industry recorded a marginal decline of 1.3 per cent and 1.7 per cent in gross profit and operating profit margins respectively during the year.

“Operating profit margin however remained high at 15.3 per cent in the same year. In addition, profitability of core assets remained high at 30 per cent as at year end.

The Industry has recorded significant positive operating cash flow in the last three years and we expect this to continue in the short to medium term”, the agency added.

It however stated that the dependence on imported raw milk powders will continue to expose industry operators to volatility in global milk prices and considerable exchange rate risks – particularly in an era of declining reserves and a strong chance of devaluation.

“Continuous growth in the demand for dairy products should increase operator’s ability to pass off an increasing share of costs to consumers.

Overall, the Industry’s financial condition is expected to remain positive, supported by good profitability, low leverage and good operating cash flow. We thus believe the outlook for the Nigerian dairy industry is positive, “the rating agency explained.

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