Unilever Nigeria plc’s slow start to the year is a manifestation of the weak macroeconomic environment Fast Moving Consumable Goods (FMCG) companies operate in.

For the first three months through March 2015, Unilever’s net income fell by 21 percent to N590.04 million, from N750.63 million the same period of the corresponding year (Q1) 2014.

Earnings per share (EPS) reduced by 21 percent to N0.16 in 2015, as against N0.20 the previous year.

“Univeler’s Q1 2015 results were dragged down by a -400bp y/y gross margin contraction owing to the impact of naira devaluation on raw material prices,” said Olajumoke Okeowo, equity research analyst with FBN Capital in a May 26 note to BusinessDay.

FMCG firms are groaning under a harsh operating environment as inflationary pressure in Nigeria is holding back consumer spending.

The devaluation of the naira also exposes these firms to exchange rate risks as most import their raw materials, hence leading to cost push inflation culminating in rising costs of production. Inflation increased to 8.7 percent in April, close to the top of the firm’s 6 percent to 9 percent target band.

Nigeria’s central bank devalued the naira as falling oil price overwhelmed foreign exchange – exchange reserves. The naira has lost more than 13 percent of its value against the dollar in the past six months, and was trading 0.2 percent stronger at 199 a dollar by 3:47 p.m. in Lagos on Tuesday.

While Nigeria is Africa’s largest economy and oil producer, consumer goods firms like Unilever have had growth stunted by huge energy costs caused by heavy reliance on diesel oil to power plants at the factory.

Unilever’s cost of sales increased by 15 percent to N9.84 billion, compared with N8.58 billion the previous year as macroeconomic challenges aforementioned twitches the bottomline of consumable goods firms.

Cost of sales ratio increased to 66 percent to in 2015, as against 62 percent last year. This means the company is spending more on input costs to produce each unit of products.

Gross profits were down by slightly by 3.45 percent, while gross profit margin reduced to 34 percent in 2015 from 38 percent in 2014.

Unilever’s profit also took a hit from a 114 percent surge in finance charges. The company borrowed money for the purpose expansion of operations with a view to increasing share of the market.

FMCG firms like Unilever that operate in Nigeria have also had the security challenges in the North part of the country hurt operations.

“Insecurity challenges and increased competition mean that consumer goods names cannot readily pass on higher costs to consumers for fears of market share loss,” said Okeowo. Unilever’s total assets increased by 5.23 percent to N48.14 billion in 2015, from N45.73 billion last year

The company’s share price closed at N45 on the floor of the exchange, while market capitalisation was N170.28 billion.

June 1, 2015; http://businessdayonline.com/2015/05/unilever-profit-drop-highlights-consumer-firms-woes/#.VW57u0Y-5G0