Msa1 Economic Environment

Article

Onu, E. and Nwaohuocha, O. 2016, ‘Nestle Nigeria Sees Margins Pressured as Inflation Weighs’, Bloomberg, 17 August, viewed 20 August 2016,

Summary

Onu and Nwaohuocha (2016) explore the effects of an economic downturn in Nigeria and the struggle of Nestlé Nigeria Plc (Nestlé) in maintaining profit-margin growth amidst high inflation rates and foreign exchange losses.

Key concepts

This article encapsulates the implications of currency exchange fluctuations on Nestlé and their effects on the profit-margin of a business. As Nigeria has moved from fixed to flexible rate policy (Yinusa 2008), this allows for floating exchange rates determined by market forces (Emenike 2016). Following the central bank dropping a ‘16-month peg against the U.S. currency’ (Onu and Nwaohuocha 2016), the Naira has since weakened against the dollar by over 30 percent (Holodny and Bobkoff 2016), consequentially affecting Nestlé’s earnings.

This article also notes that the highest inflation in nearly 11 years has affected Nigeria, who now ranks the 8th highest inflation country in Africa (FDC 2016). A report from the National Bureau of Statistics states inflation has risen to 16.5 percent (Okwe and Oditta 2016). NBS (2016) noted that a combination of energy and transport costs together with food imports has had a significant impact on the inflationary direction. This cost-push inflation caused by an increase in prices of inputs has thus put pressure on Nestlé profit-margins (Onu and Nwaohuocha 2016).

Analysis

Looking to the future following Nestlé’s half-yearly results, subsequent depreciation in the Naira portends further downside risk for profit-margins (Codros Capital 2016). Nestlé reported a loss before tax of –N7.8bn and net foreign exchange losses of –N13.1bn resulting from a 38 percent depreciation of the Naira which particularly affects Nestlé’s dollar-denominated loans amounting to US$120m (FBNQuest Research 2016). Regarding inflation, FDC (2016) notes the global prices of cocoa and sugar, Nestlé’s main imported raw materials, have increased by 6.47% and 26.4% respectively. This together with the shortage of gas supplies in the Niger Delta region will lead to Nestlé relying more on expensive cost alternatives, further affecting earnings (Holodny and Bobkoff 2016).

However, to combat such macroeconomic forces, Nestlé will aim to use its competitive advantage to ‘ride out a forecast contraction of 1.8 percent in the economy this year’ (Onu and Nwaohuocha 2016). CEO Dharnesh Gordhon explains this is because 92 percent of Nestlé products are produced locally, meaning less reliance on imports (Onu and Nwaohuocha 2016). Additionally, Nestlé should expect some recovery in profit-margins following cost cutting measures and increases in price across principal products such as Milo and Maggi (Codros Capital 2016). Already, Nestlé’s financial statement shows revenue grew 22 percent to N80.4bn (Nestlé Nigeria 2016).

Nevertheless, Onu and Nwaohuocha (2016) explain that while the CBN attempts to help Nigeria with macroeconomic risks, Nestlé and other businesses will still find dollar supply unpredictable. Though revenue increased, costs also rose 28 percent, to N47.7bn (Nestlé Nigeria 2016), therefore experts do not believe mild price increases are enough to offset rising production costs and maximize profit-margins (FBNQuest Research 2016).  The Economic Intelligence Group forecasts inflation to continue accelerating following a predicted increase of 17.2% in July (Access Bank 2016). Therefore, as 82 percent of Nestlé’s borrowings are dollar-denominated with 70 percent owing this year, due to the continued currency depreciation, higher interest rates and increasing inflation, this presages negative effects on Nestlé’s overall earnings with little foreseen improvement in the future (FDC 2016).

CSR

Nestlé’s mission ‘Good Food, Good Life’ (Nestlé CWA 2016) together with its 8 CSR categories including Nutrition, Rural Development and Human Rights prove ‘high centrality’ (Burke and Logsdon 1996). Nestlé particularly supports optimal nutrition, demonstrated through 192 billion micronutrient-fortified products in 2015 (Nestlé S.A. 2016 p. 16). It is important for Nestlé to maintain this specific and visible connection between business activities and CSR efforts (Ding, Ferreira and Wongchoti 2016), as consumers consider this ‘when evaluating companies and their products’ (Oberseder, Schlegelmilch and Murphy 2013, p. 1840). However, since opposing ethical theories with children under 15 continuing to work at Nestlé cocoa farms though Nestlé’s code of conduct prohibits this (Clark 2015), Nestlé has been visible as a company with questionable CSR. There has also been a decrease in products with essential nutrients from 6359 in 2014 to 4643 in 2015 (Nestlé S.A. 2016). Despite this, the company strives to be proactive in their CSR response to such issues demonstrated through the 2016 introduction of the Child Labour Monitoring and Remediation System (Nestlé S.A. 2016). CEO Paul Bulke also describes the ‘substantial training and education of people inside and outside Nestlé’ (Nestlé CWA 2016 p. 2) to continue future CSR initiatives.

Reference List

Access Bank 2016, ‘Inflation Rate to Accelerate to 17.2% in July 2016 - Access Bank’, Proshare, 12 August, viewed 21 August 2016,

Burke, L. and Logsdon, J.M. 1996, ‘How corporate social responsibility pays off’, Long Range Planning, vol. 29, no. 4, pp. 495-502, viewed 25 August 2016, ScienceDirect, doi: 10.1016/0024-6301(96)00041-6.

Clarke, J.S. 2015, ‘Child labour on Nestlé farms: chocolate giant's problems continue’, The Guardian, 2 September, viewed 23 August 2016,

Codros Capital 2016, ‘Nestle Nigeria Plc Q2-16 Earnings Impacted by Rising Costs and Currency Headwinds’, Proshare, 4 August, viewed 21 August 2016,

Ding, D.K., Ferreira, C. and Wongchoti, U. 2016, ‘Does it pay to be different? Relative CSR and its impact on firm value’, International Review of Financial Analysis, vol. 47, no. 1, pp. 86-98, viewed 25 August 2016, ScienceDirect, doi: 10.1016/j.irfa.2016.06.013.