As Nigeria continues efforts to diversify its economy and foster business growth, distribution costs have emerged as a significant challenge across various sectors, putting pressure on profit margins and overall competitiveness. An analysis by BusinessDay of 19 firms across five major sectors—cement, FMCGs (fast-moving consumer goods), breweries, healthcare, and oil and gas—reveals that distribution and selling costs surged to ₦920 billion in the first nine months of 2024, a 64.1% increase from ₦560.5 billion in the same period of 2023.
Cement Industry: The Biggest Cost Burden
Cement manufacturers topped the list with the highest distribution expenses, totaling ₦574.1 billion in 2024, up from ₦334.3 billion in 2023. The country’s top cement makers, including Dangote Cement, BUA Cement, and Lafarge Africa, have been grappling with especially high logistics and transportation costs, driven by Nigeria’s poor road infrastructure and high fuel prices. Cement is a heavy and bulky product requiring specialized trucks for distribution, making transportation more expensive compared to lighter consumer goods like beverages or food products.
A Lagos-based analyst highlighted the inefficiency of Nigeria’s roads, explaining that “what should be a two-hour drive can stretch to an entire day due to road conditions.” This added time translates into higher fuel consumption, maintenance costs, and wear and tear on vehicles, further driving up distribution expenses.
Femi Egbesola, National President of the Association of Small Business Owners of Nigeria, pointed out that businesses in sectors like cement, where products must be delivered directly to consumers, face higher distribution costs compared to sectors with more centralized retail channels.
Breweries: A Significant Jump in Costs
Breweries, particularly the large players like Nigerian Breweries, International Breweries, and Champion Breweries, also saw significant rises in distribution costs. Nigerian Breweries recorded the highest distribution cost at ₦143 billion, representing 20% of its total revenue for the period. Similarly, International Breweries saw its distribution costs rise sharply to ₦47.9 billion, up from ₦10.4 billion, while Champion Breweries’ costs more than doubled, reaching ₦3.2 billion from ₦2.2 billion.
Increased fuel prices, rising transportation costs, and inflationary pressures have all contributed to these higher expenses for brewers.
FMCGs: A Strain on Profit Margins
For fast-moving consumer goods (FMCG) firms, distribution and selling costs also experienced notable growth. Nestlé Nigeria, one of the largest FMCG companies in the country, reported a 24.5% increase in its distribution costs, rising to ₦73.3 billion in 2024, up from ₦58.9 billion. Similarly, BUA Foods saw a 45% increase, with its distribution expenses growing to ₦29.3 billion. Other FMCG firms, including Cadbury Nigeria, Unilever Nigeria, and Dangote Sugar, also faced rising distribution costs.
The hike in distribution expenses for FMCGs can be attributed to higher freight costs, licensing fees, and challenges in the supply chain. Rising petrol prices have directly impacted freight and transportation expenses, which have yet to be fully absorbed by consumer prices.
Oil and Gas: Sharp Increase in Costs
In the oil and gas sector, companies like TotalEnergies, Eterna Oil, Conoil, and MRS Oil collectively saw distribution costs soar by 160.6%, reaching ₦15.9 billion in the first nine months of 2024, up from ₦6.18 billion in 2023. TotalEnergies experienced the largest increase, with distribution expenses climbing to ₦11.4 billion from ₦3.9 billion.
The increase in costs for these companies reflects the growing expenses associated with fuel distribution amid price hikes and fuel scarcity. The removal of fuel subsidies earlier in the year and the devaluation of the naira have had a profound impact on the sector’s operational costs.
Healthcare: A Less Severe, But Notable, Surge
Pharmaceutical companies also experienced a rise in distribution costs, although at a somewhat more modest rate. Fidson Healthcare saw a 48.9% increase in distribution expenses, which reached ₦5.42 billion from ₦3.64 billion in 2023. May & Baker Nigeria reported a 30% increase, with costs rising to ₦2.21 billion, while Neimeth International Pharmaceutical Plc saw a reduction in costs by 28.4%, with its expenses falling to ₦412 million.
Healthcare providers and pharmaceutical firms face challenges not only from transport costs but also from regulatory and logistics hurdles, which further strain their distribution networks.
Key Drivers Behind the Surge in Distribution Costs
Several factors have contributed to the significant increase in distribution expenses across these sectors:
- Increased Fuel Prices: Petrol prices have surged by 488% within the year, and by September 2024, the average price had reached ₦1,030 per liter—a dramatic rise from ₦626 in 2023. This has led to higher transportation costs for companies, particularly those that rely heavily on road transportation.
- Infrastructure Deficiencies: Poor road conditions, limited rail infrastructure, and inefficient logistics networks have exacerbated the challenges faced by businesses. Long transit times and vehicle maintenance costs continue to drive up operational expenses, especially for industries like cement manufacturing and FMCG.
- Inflationary Pressures: The country’s rising inflation, which reached 33.88% in October 2024, further strains businesses by increasing the cost of raw materials, labor, and distribution, reducing their ability to absorb these higher expenses without raising prices.
- Naira Depreciation: The sharp devaluation of the naira has made imported goods and fuel more expensive, compounding inflationary pressures. The weakening currency has also made it harder for businesses to secure affordable financing for operations, adding another layer of financial strain.
Implications for Nigerian Businesses
The sharp rise in distribution costs is significantly impacting Nigeria’s business environment. Textile exporter Oluwasegun Balogun lamented that rising logistics costs have made Nigerian products less competitive in the global market. Similarly, small business owners like Ijeoma Jonathan, CEO of Majestic Roobee, voiced concerns about how escalating transport costs are cutting into their profit margins and making it harder to source raw materials.
As businesses struggle with these mounting costs, there are growing calls for government intervention to address the country’s infrastructure challenges and provide support to local businesses, especially in key sectors like manufacturing and agriculture.
The sharp increase in distribution and selling costs across various sectors in Nigeria is a significant concern for businesses already grappling with inflation, high fuel prices, and an unstable currency. The situation demands urgent attention from policymakers to improve infrastructure, reduce the burden of fuel prices, and create a more conducive environment for local businesses to thrive. Without these changes, Nigerian businesses will continue to face steep competition in both domestic and international markets, further straining an already fragile economy.