Growing opportunities in diverse sectors of Nigerian economy
RANKED 26th in the world in terms of gross domestic product (GDP), (nominal: 30th in 2013 before rebasing, 40th in 2005), and the largest economy in Africa (based on rebased figures announced in April 2014), Nigeria is a middle income emerging market, with expanding financial, service, communications, technology and entertainment sectors.
The country is also on track to become one of the 20 largest economies in the world by 2020.
Though currently underperforming, the manufacturing sector is the third-largest in Africa, and produces a large proportion of goods and services for the West African region.
The National Bureau of Statistics released the figures for the rebased GDP in April capturing a more accurate data of the aggregate economy and giving a better picture of more recent economic activities from the industries like telecommunications and the entertainment.
However, the recent economic achievements may not have been possible if not for the economic reforms of the past decade.
The reforms have put Nigeria back on track towards achieving its full economic potential. Nigerian GDP at purchasing power parity (PPP) has almost tripled from $170 billion in 2000 to $451 billion in 2012, although estimates of the size of the informal sector (which is not included in official figures) put the actual numbers closer to $630 billion.
Similarly, the GDP per capita doubled from $1400 per person in 2000 to an estimated $2,800 per person in 2012 (again, with the inclusion of the informal sector, it is estimated that GDP per capita hovers around $3,900 per person).
Before the reforms, Nigeria was one of the poorest economies in the world. The major causes of the decline in Nigeria’s economic fortunes have been political instability and bad governance, most especially in the 1990s.
Military rule in Nigeria, as has been the case in most other countries with prolonged military rule, led to economic and social stagnation and decline. Similarly, the advent of an elected government at the dawn of the 21st Century after almost three decades of military rule should afford Nigeria the opportunity to arrest the decline in her socio-economic development and embark on economic revival.
As a result of the revival, several organizations including the World Bank have predicted that Nigeria’s growth will continue in the foreseeable future. The question now is what sectors of the Nigerian economy will champion this growth? Agusto & Co. & Co. provided the answer in its “2014 Industry Reports.”
The report identified Agriculture, Real estate, power, automobile, dairy and poultry; Insurance and Banking sectors as key drivers of economic growth and job creation over the next decade. Agusto & Co. also identified the vast opportunities in the power sector for intending investors, given the wide demand-supply gap and the country’s market size.
The report also highlighted several challenges facing these sectors and identified investment opportunities as well. Other sectors covered by the reports include fast food, telecommunication, pasta and noodles, commodities (rice and sugar), oil and gas, personal care and packaging.
Opportunities in the agricultural sector
Following the agricultural transformation agenda of President Goodluck Jonathan, the nation’s agriculture sector has witnessed several changes. Urging that the reforms must continue, Agusto & Co. pointed out that the growth in Nigeria’s agricultural sector remains crucial to the economy as; agriculture employs 70 percent of the country’s labour force and accounts for 22 percent of the nation’s rebased GDP.
“Poultry, a sub-segment under in agriculture spurs the sector with its estimated average annual growth of 6 percent both in chicken (broiler) meat and hen egg production since 2007. Currently, the size of Nigeria’s poultry industry is estimated to have reached ₦373.03 billion in 2013. Domestic rural production of poultry accounts for the bulk of the Industry at 85 percent with the balance attributable to local commercial poultry production and illegal imports of frozen poultry products.
“To succeed in Nigeria’s poultry industry, critical success factors include: availability of credit, good storage facilities, efficient supply chain management, administration of quality vaccines, and access to markets, amongst others. With improved inputs, the “eating out culture” continuously influencing the growing patronage of quick service restaurants (QSRs) and favourable government policies the poultry industry will continue to thrive in Nigeria, “it stated.
The report also identified stronger poultry associations advocating for favourable policies coupled with increasing population (hence, growing household demand for chicken meat during festive periods) as key success factors for the industry.
Opportunities in the power sector
The report stressed that vast opportunities exist in the Power sector for intending investors, given the wide supply – demand gap and the country’s huge population.
It added that as at March 2014, electricity supply from the national grid stood at 4,306MW, far below the estimated demand of 12,800MW.
This, it added, implies that currently Nigeria is only generating about 34 percent of the country’s requirements, and this provides an enormous potential for new and existing players in the Industry.
“The demand for electricity in Nigeria has been upheld by strong economic growth and increasing urbanisation. With annual economic growth estimated between seven per cent and 13 per cent, as well as urbanization rate of 3.8 percent, electricity demand in Nigeria is projected at 15,730MW, 41,133 MW and 88,282MW by year ends 2014, 2015 and 2020 respectively.
“To meet the electricity generation projection for year 2020, about 17,441 qualified technicians and engineers are required by the Industry. Furthermore, industry operators require access to stable long term financing, reliable and consistent gas supply, as well as credible power trading/purchase agreements to expand their operations,” the report revealed.
Agusto & Co. estimates the turnover of the industry at over ₦380 billion, representing approximately 0.5 per cent of Nigeria’s rebased GDP of ₦80 trillion.
The industry, it stated, employs about 50,000 workers, majority of which are on the payroll of the PHCN successor companies. Profitability varies from one segment of the Industry to another, with grid-connected generation remaining the most profitable.
It added that “this is mainly due to the economies of scale derived by grid connected independent power producers (IPPs) and the PHCN successor generation companies (Gencos). Typically, when plants are operating at optimal capacity, grid generation plants record operating profit margins in the region of 15 per cent-20 per cent (due to economies of scale advantage).”
The telecommunication industry
The report noted that the Nigerian telecommunications Industry is fast approaching maturing with the market nearing saturation and priorities of consumers changing to reveal a growing desire for a greater quality of service.
The regulators, it stated, are taking note of consumers’ wishes and imposing strong penalties on operators who fall foul of the set quality of service targets.
It added that operators too are proactively adapting their businesses, streamlining operations by outsourcing non-core competencies and investing in infrastructure, in order to be better positioned to meet the immediate challenges of the industry.
“The financial performance of operators in the Industry varies considerably with a successful handful of the large players skewing the aggregate picture to mask the dire conditions faced by the majority. The Nigerian Telecommunications Industry as whole is characterised by good profitability, strong operating cash flows and an adequate short term financing structure.
The Industry is however constrained by high leverage and the large variation in the fortunes of the operators. The financial performance is expected to improve in the medium to long term as maturity comes and weaker players are acquired, merge or exit the Industry, “it stated.
The Nigerian telecommunications industry, the report noted, has shown reasonable growth in recent years with the Industry’s subscriber base growing by 10 per cent in 2013 to 127 million active lines.
It added that the industry’s contribution to nominal GDP made a quantum leap under the recent GDP rebasing exercise carried out by the National Bureau of Statistics (NBS) from less than one percent in 2013 based on the old computations to 8.7 percent using the rebased figures.
“The GSM mobile-cellular segment continues to dominate the telecommunications landscape in Nigeria accounting for the vast majority (over 97%) of the subscriptions in Industry. The other voice segments – CMDA mobile-cellular and fixed-telephone – continue to struggle and face bleak futures having failed to generate sufficient network effects. MTN remains the dominant player in the Industry, accounting for a 45 per cent share of the total subscriber base of the GSM mobile-cellular segment in 2013, “said Agusto & Co.
The report disclosed that the fixed-broadband internet segment of the industry has plenty of growth potential with a number of operators having landed high capacity subsea fibre-optic cable in Nigeria in recent years.
It added that the Nigerian government has also shown commitment to mobilise the capacity, which has largely been trapped around the landing areas, to various parts of the country through its Open Access Model plan.
Growing fast food industry
The report noted that in spite of several challenges the fast food industry remains resilient with operational efficiency and service delivery as key to the fast food restaurants’ ability to generate revenue in a highly competitive business.
“In addition, menu innovation, food price and location (catchment area) is important to the success of a fast food industry. We thus maintain a stable outlook for the Nigerian fast food industry as it continues to grow, attracting international fast food players such as KFC and investments from private equity firms, “it said.
Agusto & Co. in the report however said it expects the market dynamics to change as new trends develop in the fast food industry such as reliance on technology to drive revenue growth and productivity (customer orders online and other phone apps), a growing preference for offering catering services to business clients and/or delivering fast food for office events and functions and finally resorting to innovative menu offerings to gain competitive advantage.
Supporting these changes, they added, are the improving regulatory oversights of the Industry.
“The Nigerian fast food industry is regulated by the National Agency for Food and Drug Administration and Control (NAFDAC) (mandated to ensure the safety of all consumer products including food in Nigeria) and the Standards Organisation of Nigeria (SON) (mandated to oversee industrial standards for products and processes in the country).
“The Industry’s regulators have introduced policies to ensure food safety during and after preparation. The fast food industry also relies on imported goods. Most fast food raw materials with the exception of perishables such as vegetables are imported. However, the supply of these food items in Nigeria is restricted due to the ban on importation on some of these items as well as high tariffs / duties on others in a bid to develop local markets.
“In 2012, the Federal Government announced a ban on rice imports effective 2015, in addition a levy on rice (brown, semi and wholly milled rice) was set at 100 percent effective 31 December 2012, whilst others have import bans such as pork, beef, fruit juice in retail packs, live or dead birds including frozen poultry.
“This has led to high prices for the Industry’s raw materials. We estimate that raw materials (food & beverage) made up about 45 percent of the Industry’s costs, followed by property (rent, maintenance & depreciation) at 18 percent and energy at 15 per cent. In terms of revenue generation, proteins (meat, chicken, and fish) and traditional cuisine account for about 30 per cent and 20 per cent respectively of total sales,” the report revealed.
The persistent growth in the real estate sector
The report valued the Nigerian real estate market at ₦6.4 trillion ($41.2 billion), with the Lagos sub-segment accounting for at least 40 percent of the total market.
Growth, it added, continues to be driven largely by new to market residential and commercial properties in Lagos, Abuja and Port Harcourt.
It estimates the market to grow by an estimated average of 10 per cent in 2014 & 2015 respectively.
According to the report, “The Lagos real estate market, which has evolved in the last decade, continues to record significant growth in both the residential and commercial sub-segments. The key growth factors include population growth, economic growth, rapid urbanisation, rising consumer disposable income and the introduction of mortgages.
“Supply of real estate properties in Lagos have been supported by the improvement in land titling and ownership transfer, government’s development plans and improved security framework in the state. The Lagos real estate market was delineated under the residential and commercial segments for adequate coverage. “
The residential segment
The report pointed out that the Lagos residential market remained strong remained across the various sub-markets.
New residential investments, it pointed out, were prominent in the prime markets comprising Ikoyi, Victoria Island, Lekki and Ikeja GRA.
It added that its research also revealed that new residential investments in the prime markets targeted the growing expatriate community and affluent indigenous tenants.
The report stressed that supply of new residential investments in the most mainland markets remained subdued due to shortage of land, leaving property developers with the option of buying and remodelling old properties.
“However family holdings in the mainland market remained a limiting factor to the buying & remodelling option. Owing to the low concentration of affluent and expatriate tenants on the mainland, residential property developers are strongly attracted to the prime markets. Rentals and sales prices were higher in the prime market compared to the mainland market. Typical rental for a 3-bedroom luxury residential property was highest in Ikoyi at an average of ₦10.4 million ($65,000) per annum, with a rental yield of 9.9 percent.
“Conversely, rental price changes were prominent in the mainland market, with Surulere recording a high cumulative rental price change of 29 per cent from January 2011 to April 2014. Sales prices were also highest in the Ikoyi sub-market, with the price of a four-bedroom detached house on a 2000m² land trending up to ₦856 million in the first half of 2014. Land prices in Lekki and Victoria Island reported the largest cumulative change of 23 percent and 22 per cent respectively between 2011 & 2014.
“The Ibeju-Lekki development plan remains a strong driver of land and property price changes in the areas. Market perception for the Ikorodu sub-market declined in the review period due to the slow infrastructural development in the area. Although the on-going construction of the mono-rail and the Lagos-Badagry expressway has negatively impacted real estate activities on the Badagry axis, we believe completion of the projects will support growth of real estate properties in this axis, “it said.
The new middle class growth and the rising opportunities in the pasta and noodles market
Government policy, the report noted, has been instrumental to the growth of the pasta & noodles market.
It added that the ban on the importation of pasta & noodles has encouraged the production and consumption of locally produced food.
The report stressed however that wheat, the main ingredient required for the production of pasta & noodles, is not produced in large enough quantities to satisfy domestic consumption.
Due to low wheat production, it said Nigeria spends up to ₦634 billion on the importation of wheat annually.
It added that “to address the issue of high wheat importation, the Cassava Inclusion Policy took effect in July 2012. The cassava inclusion policy is aimed at stimulating backward integration by the agro-allied and food industries in order to boost local farming output. As Nigeria is currently the largest cassava producing country in the world, the policy is aimed at increasing cassava consumption and involves a 10 per cent cassava flour inclusion to wheat flour with a view to reaching a 40 per cent inclusion rate. Furthermore, to make clear its intentions, the government increased the levy on wheat grain from five per cent to 20 per cent and introduced an additional 65 percent levy on wheat flour imports taking it from 35 percent to 100 per cent.
“Although the current 10 percent cassava inclusion has largely gone unnoticed by customers, an increase to 20 per cent or further to 40 percent could result in harder textured noodles and possibly a dip in demand for the product, as customers struggle to adapt to the change in ingredient composition. We therefore expect that poor acceptance of significant inclusion of cassava flour into pasta and noodles and other wheat based products remain a huge challenge that could stymie the success of the cassava inclusion policy.”
It disclosed that dairy is the second largest segment in the food and beverage industry in Nigeria, with estimated revenue of ₦347 billion in 2013 and an estimated Compounded Annual Growth Rate (CAGR) of 8 percent over the last three years.
The industry, the report revealed, consists of six major market segments: milk, yoghurt, cheese, Ice cream, butter and Infant formula.
The milk segment, it added, is the largest in the Industry and accounts for an estimated 61 percent of the Industry’s turnover.
The dairy industry, it said, 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 Promassidor Nigeria Limited, Nestlé Nigeria Plc and PZ Nutricima. Operator’s in the Industry have extensive distribution channels, strong foreign partnerships and enjoy strong product demand. The Industry is however, susceptible to the volatility in the price of raw milk powder, adverse movements in exchange rates, poor infrastructure and inconsistencies in government policies, “said Agusto & Co.
The report revealed that there is a wide gap between the harvested milk (local supply) in Nigeria and demand, which has resulted in a substantial importation of milk.
It stated that 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 adding that imported milk powder accounts for over 75 per cent of the Industry’s input.
It added that 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 noted.
*This analysis was based on Agusto &Co’s 2014 industry reports.