Economic Note

THE NIGERIAN CONSUMER SPACE: How large in the market?

The Nigerian consumer market is estimated to be worth N14.7 trillion, the food and drinks (including alcoholic) is the
largest composite of the Nigerian consumers spending on goods and services. Key drivers of the consumption in the
country include:

Strong demographics: an estimated 168 million people which places it as the 8th largest country in the world

by population and is expected to be the 4th largest by 2050 according to World Bank forecasts. This implicitly
suggests its potential to consume food and other goods and services; we believe political instability and misuse
of resources in the past have been responsible for its underperformance relative to the leading economies. Given
the countrys current disposition and growing democracy, we think the country is poised to join the league of
the worlds largest economies which fundamentally is also a function of the size of its growing population.
Higher income levels: high income levels which would continue to rise over the long term driven by strong

macro-economic growth and improvement in infrastructural development which will induce a private sector led
economy.
High urbanisation rate: the rural-urban migration gure was 52% in 2010, and is expected to grow to 56% by

2015.
Westernization and innovation: We believe Western culture is rapidly inuencing the consumption of goods

and services in Nigeria, particularly at the higher end of the market. This has forced the introduction of certain
meals such as pasta and noodles which are not of Nigerian origin, but are increasingly being demanded across
social classes. Within the soft drink and alcohol segment, items such as smoothies and champagne are making
remarkable progress in the market place based on our channel checks. Innovation among consumer companies
is also playing a very important role in increasing the appetite for food & drinks. One of the most recent trends is
the packaging of consumer products in smaller units using 5ml/5g sachet.

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FOOD & BEVERAGES SECTOR OVERVIEW

The Nigerian Food and Beverage industry in conjunction with the underlying Agricultural Sector bears the responsibility of feeding a populous and developing nation and holding the single largest portion (>42%) of economic
and trading activity. The Industry has shown strong growth over the last 10 years coming of the heels of a relatively
stable economic climate. Changing demographics greater number of people migrating from rural to urban areas,
more women working and more children attending schools have contributed to the thriving demand for the
Industrys products. The Industrys products are fast becoming an essential part of the national diet, particularly in
the urban areas. The Food and Beverage industry in Nigeria is at the fore in the manufacture of dairy products, hot
beverages, seasonings, convenience foods, confectioneries and staple foods such as bread, pasta and noodles. The
demand for products of processed foods from Nigerian consumers is estimated to be in excess of N500 billion per
annum. The low purchasing power of the average Nigerian consumer, however, dictates that fortunes in the Industry are highly dependent on the aordability of products- price and distribution are thus more strategically important than brand building and enhanced quality. The low level of infrastructural development and the tropical
climate also accentuate the importance of the shelf stability of products as a factor for success in the Industry.
The focus of spending on Food & Beverages comprises has a broad bread/ cereal subset; which represents 21% of
the Food & Beverage basket. Relative to other developing markets where the consumption of bread & cereal averages 15% of the basket and counter to most other consumption indicators (including benchmarks like electricity,
cement, beer hectolitres, etc.) which are low, consumption of breads & cereal in Nigeria is high; again indicating
relatively low income per capita, which induces the consumption of cheaper and high starch food. Bread is a basic
food commodity in Nigeria given its relatively low cost and established distribution base via the vast informal sector as compared to other major food commodities like rice, corn, cassava and yam. The basket of our millers under
review (Flour Mills Of Nigeria, Dangote Flour Mills and Honeywell Flour Mills) dominate, on average supplying up to
75% of the our used to produce bread in Nigeria, while 80% of the our milled in Nigeria is used for the production of bread. Other major components of the Nigerian food and drink basket include: fruits & vegetable, meat, seafood, alcohol & tobacco, soft drinks, diary and oil & fat. The consumption of meat and seafood in Nigeria is relatively
higher than other developing and developed markets (where it averages 25% and 20%, respectively), because of
cultural factors.

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In Nigeria, the consumption of meat or seafood during each meal is a norm, whereas in similar markets a meal may
not be accompanied with meat or seafood. With respect to the consumption of alcohol (largely beer) and soft
drinks there remains signicant growth upside in Nigeria as its weight in the food & drink basket in developed
markets (25%), suggests that an increase in household income increases the consumption of alcohol and soft drinks
and their weight to the consumers food basket increases.
The Food & Beverage industry is one of the most globally competitive industries dominated worldwide and in
Nigeria by a handful of multinational companies. In food and Fast Moving Consumer Goods (FMCGs) the growth
dynamics for Africas largest nation by population remain very encouraging. With incomes rising and more people
able to aord goods, there is a lot of room for growth and in reality only the surface of this potential has been
scratched. Nigeria ranks second in Business Monitor International's recently launched Food & Drink risk/reward
ratings for Sub-Saharan Africa behind only South Africa and comfortably ahead of the other growth economies, as
the table below illustrates.
SUB-SAHARAN AFRICA FOOD & DRINK RISK/REWARD RATINGS Q112
Reward

Risk

Reward

Industry
Reward

Country
Reward

Risk

Industry Country
Food &
Risk
Risk Drink Rating

South Africa

61.3

68.0

54.7

61.4

70.0

52.9

61.4

Nigeria

77.7

84.0

71.3

36.5

20.0

53.0

61.2

Ghana

63.5

74.0

53.0

35.9

25.0

46.9

52.5

Angola

68.8

82.0

55.7

25.1

15.0

35.1

51.3

Uganda

64.0

74.0

54.0

32.1

20.0

44.2

51.2

Tanzania

61.8

66.0

57.7

32.0

20.0

44.0

49.9

Mozambique

62.0

70.0

54.0

28.2

20.0

36.4

48.5

Kenya

56.8

56.0

57.7

35.0

25.0

45.0

48.1

Zambia

53.5

54.0

53.0

39.6

30.0

49.2

47.9

Botswana

47.0

54.0

40.0

47.3

50.0

44.7

47.1

10

Namibia

45.8

48.0

43.7

46.2

50.0

42.5

46.0

11

Cote d'Ivoire

58.3

60.0

56.7

24.6

15.0

34.3

44.9

12

Cameroon

56.3

56.0

56.7

27.4

15.0

39.9

44.8

13

Gabon

47.8

52.0

43.7

33.1

20.0

46.2

41.9

14

Rank

Source: BMI. Scores out of 100, with 100 highest. The Food & Drink Risk/Reward Rating is the principal rating. It is comprised of two subratings Reward' and 'Risk'', which have a 60% and 40% weighting respectively. In turn, the 'Reward' Rating is comprised of Industry Reward and Country Reward, which have equal weighting and are based upon growth/size of food/alcohol and soft drinks industry
(Market) and the broader economic/socio-demographic environment (Country). The 'Risk' rating is comprised of Industry Risk and Country Risk which both have 20% weightings respectively and are based on a subjective evaluation of industry regulatory and competitive
issues (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings.

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Post-production, the centrality of the vast and labyrinthine informal sector on the trade/distribution within the
Food Staples market cannot be understated. There is still very little formal leverage across much of Sub-Saharan
Africa on the commercial side - retail banking penetration is modest, which makes the take-o in micro-focused
platforms like mobile banking very exciting. Additionally, key developmental indicators like formal home-ownership
and attendant nancing is still mostly in its infancy. So much activity remains under the radar across much of the
region, where the informal economy accounts for a big chunk of spending. The huge take-o in cell phones over
the past decade shows that if the price is right, there are huge opportunities at the mass market level, where consumers are willing to embrace new brands, starting with the basics which include food.
How well companies embed the distribution of products within this maze is hugely important across Sub-Saharan
Africa. Organised retail is spread so thinly and most people do their shopping at kiosks, so the dynamics of getting
products to the market are completely dierent than in other regions, especially in suburbs and outside the big
cities.
Nigeria Food Industry SWOT Analysis
Strengths

With a rapidly rising population that currently stands at about 160mn, Nigeria possesses
a potentially dynamic consumer story.

Rising spending power of the middle class will boost the food industry
Nigeria produces a number of key agricultural crops locally and is the world's fourth
largest cocoa grower.
Weaknesses

Per capita food consumption remains very low.

Nigeria's regulatory environment is notoriously poor.
Due to infrastructural inadequacies and particularly low incomes, much of the rural consumer base remains out of reach for most food companies.

The market for dairy goods is restricted by the lack of white goods in most consumers'
homes.
Opportunities

Per capita food consumption is expected to grow very strongly over the coming years
Investment into the highly underdeveloped mass grocery retail (MGR) industry should
strengthen internal trade systems, getting a wider range of consumer goods to a larger consumer base.
Companies competitive in the mass market will be particularly well placed for strong
growth
Wealthiest Nigerians will continue to ll their baskets with the most expensive goods

Threats

Widespread corruption and an unfavourable regulatory environment remain signicant

investment deterrents.

Local producers must source a high proportion of their inputs from abroad, increasing
costs.

Competition from regional countries with better business environments, such as Ghana,
could see Nigeria lose out on foreign direct investment.

Producers will struggle to maintain their prot margins in the face of rising key commodity costs paired with a highly price-conscious consumer base.

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FLOUR MILLING SUBSECTOR

The Nigerian our milling industry provides the raw material

for one of the countrys most widely consumed staple foods;
bread- which in the mid-70s (alongside largely imported rice)
surged past local grain-based foods to become most
consumed. Approximately 80% of the our produced locally
is used to produce bread. Other uses include the production
of biscuits, cakes, pasta, noodles, semolina, semolina and
others.
Industry concentration is largely reective of the signicant
barriers to entry in terms of:
1) location it is more ecient to be closer to a port given
that wheat is imported;
2) cost of building our milling capacity (including mills and
power generators);
3) presence of dominant brands the three largest our
millers have well established brands (Golden Penny, Dangote
and Honeywell). In addition, the industrys signicant
working capacity requirement, following the surge in wheat
and energy prices in 2008, forced a sector consolidation with
Crown Flour Mills and the Chagoury Group selling their mills
to Olam International and Flour Mills Nigeria (FMN)
respectively.

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Based on current capacity, Flour Mills Nigeria (FMN) is the largest miller in Nigeria with a capacity of 3.3mtpa
representing a market share of 50%; Dangote Flour Mills (DFM) tails with a capacity 1.6mtpa representing market
share of 25%, followed by Honeywell Flour Mills (HFM) (531ktpa 8% market share); Olam International (8%);
Chagoury Group (6%) and BUA Group (3%). We note that even though the Chagoury Group has 6% of the industrys
market share by capacity; its mills produce less than half of its installed capacity because they are relatively old. Even
though we expect further capacity expansion across Nigerian our mills, we anticipate new capacity over the
medium term will be driven by FMN, DFM and HFM which are in various levels of completing additional capacity of
495ktpa (+15%), 495ktpa(+31%) and 330ktpa (+20%) respectively by 2013. Dangote Flour Mills capacity is expected to
be operational by 2011, while Flour Mills Nigeria and Honeywell Flour Mills will be operational by 2013.
On the back of these expansion plans, we do not expect a major change to the market structure. In 2013, FMN will
remain the dominant player with a market share of 48%, while DFM and HFM will witness a slight improvement in
market share to 27% and 11%, respectively. Recently, the industry has been plagued by diminished returns due to a
resurgent increase in the prices of wheat from $171 per tonne on the 1st of January 2010 to $281 in mid-August
2011, characteristically the food based industry have been able to pass on the cost to its customers without any
adverse impact on sales volumes, also hedging their foreign exchange exposures via spot and forward contracts. The
industry is expected to remain robust as demand for our; particularly bread our continues to rise driven by strong
demand for bread and other confectionaries.
The consumption of wheat our is not expected to shrink over the next few years because of increasing capacity of
the Nigerian consumer to spend on food in the future and the sustained cultural inuence of the imported staple
particularly among the aspirational working, middle and upper classes resulting in wheat consumption rising 10% per
annum over the next few years. The aordability of wheat-based food relative to traditional food (rice, corn and
cassava our which surged amid a global food crisis in 2006/2007) make wheat based products like bread, pasta,
noodles and semolina a relatively more aordable and nutritious option. Currently a kilogram of wheat our retails for
c.N107 vs. more expensive alternative staples such as rice (N164/kg) and yam (N167/kg). Corn and cassava on the
other hand are cheaper at N82/kg and N93/kg respectively; however, the consumer appreciates that wheat our is a
better trade-o in light of its high protein content vs. corn and cassava which are low in protein.

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The Federal Government is introducing policies to encourage substitution of wheat our in bread-baking with high
quality cassava our, under the proposed guidelines, bakeries will have 18 months in which to make the transition,
and will enjoy a corporate tax incentive of 12% rebate if they attain 40% blending. Eective from March 31st 2012,
importation of cassava our will be prohibited so as to further support this programme, while all equipment for
processing of high quality cassava our and composite our blending will enjoy a duty free regime as incentive to
bakers for composite our utilization. In a bid to reduce pressure on the countrys foreign reserves and dependence
on wheat for manufacturing of our and allied products, wheat our will attract a levy of 65% to bring the eective
duty to 100%, while wheat grain will attract a 15% levy which will bring the eective duty to 20% from July 1st, 2012.

COMPANY COMPARISONS
In this section we analyse the Big 3 our milling companies i.e Flour Mills Nigeria Plc, Dangote Flour Mills and
Honeywell Flour Mills on the basis of protability, operational eciency, corporate governance, liquidity, and
nancing strategies impact on the companies bottom-line.

Protability Analysis
Flour Mills return on equity of 20.9% leads the pack, with HFM and DFNs at 16.47% and 9.75% respectively. However,
Honeywell Flour was the only rm showing growth in this index, improving from 8.70% a year before, while DFN and
FMN declined from 20.85% and 33.13% respectively. The impressive expansion in HFM was as a result of a 381bps
increase in the net prot margin from 3.51% in 2010 to 7.32%, a 5% rise in asset eciency (total asset turnover) and a
decline in nancial leverage from 2.22x to 1.93x a year later. Using the Return on Gross Invested Capital (ROGIC) ratio
places HFM on top at 27.36%, (the ROGIC is a measure of return expressed as a percentage. Gross invested capital
represents the total capital investment before any depreciation or amortization. As such, we used this because it does
not increase articially, as other measures do, from the write-down of an asset's value). ROGIC for DFN and FMN for
the same period were 17.39% and 22.44% respectively. Again, this protability index showed a consistent 3-year
upward trend only for HFM, despite increased volatility in the ratio for DFN and FMN. The EBITDA margin also
suggests HFM is the most protable amongst its peers; HFMs margin was at 16.92% compared to DFN and FMN,
which were 15.73% and 10.59% respectively. However, HFM currently trades slightly above the our industrys
average Price/EBITDA multiples. The rms stock presently trades at 4.40x compared to its industrys average of 3.76x.
On account of these indices and others such as pre-tax prot margin, return on assets and cost-to-sales ratios, we
would conclude HFMs chiey status as the most protable in the industry.
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Leverage Analysis

There is no right amount of debt. Leverage varies according to

industries, a company's line of business and its stage of development. However, recent history instructs us that low debt and
high equity levels in the capitalization ratio indicate investment
quality delivering key insights into a company's use of leverage.
Prudent use of leverage (debt) increases the nancial resources
available to a company for growth and expansion, assuming
that management can earn more on borrowed funds than it
pays in interest expense and fees on these funds. We employ
dierent tools to measure leverages eective/burden in HFM,
FMN and DFN to reach a realistic conclusion. HFMs debt prole
is the lowest amongst the three using various measures, having
a debt/equity ratio of 11.86% compared to DFN 53.38%, and
FMN 138.55%; and a debt-to-total invested capital of 10.60%
compared to DFN 34.80%, FMN 55.62%. however Dangote Flour
Mills tops the rankings when we consider cash available to meet
interest expenses, DFNs CFO-to-Interest expense of 5.56x is well
above HFM 4.15x, and FMN 2.99x; even though on an operational basis HFM leads using the interest coverage measure.
Honeywell Flour has successfully reduced the use of leverage in
the capital structure, hence giving it more exibility than its
peers in the industry. Its debt/equity dropped greatly from 233%
in 2006 to its currently levels in 2011, a period in which it successfully raised equity capital from an IPO and eventual listing in
the last quarter of 2008. The company hence has the ability to
access the corporate debt market if it wishes to in a bid to expand its current ventures and foray into new businesses.
Debt/Equity Ratios of Dangote Flour Mills, Flour Mills of Nigeria and Honeywell Flour Mills. DFN gures are December 2010, whilst FMN and HFM
are March 2011.

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Liquidity Analysis
HFMs liquidity position has consistently improved since 2008,
with current ratio rising from 0.61x to 1.42x in 2011, within the
same period its working capital progressed signicantly from a
negative position to N4.65 billion within similar time frames.
The current ratio improvement is a function of a 26% appreciation in trade receivables and a 79% in short term borrowings.
This however, increased average collection days (ACD) from
circa 41 days to 50 days and decreased average payment days
(APD) from 115 days to 111 days, an inverse movement in these
eciency ratios would have been desired. Mean industry gures for ACD and APD are 48 days and 87 days respectively,
with FMN the most ecient in managing customers payments
with an average of 25 days. Current ratios for FMN improved
over the period in review improved from 1.01x to 1.33x, while
DFN declined to 0.75x from 0.81 a year earlier.
In our opinion, HFM by all indices is the most ecient and
protable amongst the three our giants. The moderate debt in
the companys capital structure and huge growth potentials
gives it exibility unavailable to the other 2 companies, more
especially FMN. HFMs growth potential is seen when compared to its peers; the company has a 5 year CAGR of 31.40%
and a 112% PAT year-on-year increase, during similar periods
FMN and DFN had 5-year CAGRs of 4.80% and 3.04% respectively, while recording declining PATs of 4.28% and 51% respectively.
We believe FMN is in a more mature phase than its peers,
hence with relatively limited growth prospects while DFN
proves to be the least ecient in asset management.

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REQUIRED DISCLOSURES
This report has been prepared by BGL Plc. BGL Plc does and seeks to do business with companies covered in its research reports.
As a result, the rm may have a conict of interest that could aect the objectivity of this report. Investors should use this report
as one of many other factors in making their investment decisions.

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The equity research analysts responsible for the preparation of this report receive compensation based upon various factors,
including the quality and accuracy of research, client feedback, competitive factors, and overall rm revenues, which include
revenues from, among other business units, Investment Banking.

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