Global Courant
Currency volatility is a major problem for foreign companies in many African economies as it puts them at risk of losses. Two things happen when foreign companies lose confidence in the exchange rate of a market in which they operate. They exit the market or change their business model to adapt to prevailing market conditions. Since 2020, after the easing of COVID-19 lockdowns, many markets around the world have witnessed one of these disruptive shifts.
For example, in 2021, South African retail giant Shoprite began restricting capital allocations to its subsidiaries in other African countries in order to make strategic investments in its home base. The move was triggered by huge losses – related to the global lockdowns – at its foreign subsidiaries. Citing currency volatility, Shoprite withdrew its business from other African countries to capitalize on its dominance in key segments, grocery and food and beverage growing, in the South African market.
Since the pandemic, high rates of inflation and currency volatility – including devaluation – have become the norm for some African economies. We see this in Egypt, Kenya, Ghana, Nigeria, etc. These economic trends are responsible for consumer sentiment towards products and services as they tend to prioritize basic needs of cheaper relative value over luxuries and wants .
Earlier this month, the Central Bank of Nigeria reported implemented a foreign exchange clean float management system so that the naira can trade freely against the dollar instead of maintaining a pegged rate. After the CBN announced the new policy, the exchange rate plummeted from N477/$1 on June 13 to N750/$1 on June 14. The decision saw a historic drop in the naira against the dollar from N741.21/$1 to N815/$1 on Wednesday, June 21. Since then, rates have been in a volatile downward trend.
While companies like Unilever Nigeria Plc announced plans earlier this year to exit certain market segments due to currency fluctuations, Nestle Nigeria is reinventing its business in Africa’s largest economy. Recently, the fast-moving consumer food giant announced plans to increase sourcing of local commodities — such as starch and turmeric — in its African markets to reduce foreign exchange exposure. Nestle is replacing imported corn starch in Nigeria with cassava starch and has helped seven local suppliers ramp up capacity to meet the company’s supply needs, according to Reuters.
A few weeks ago in March, Unilever Nigeria Plc announced plans to withdraw from the Nigerian home care and skin cleansing market segment in order to reposition its business for sustainable profitability and focus on greater growth opportunities. The multinational brand has two business segments in Nigeria, food products and home and personal care segments.
Last year, the company brought in N88.72 billion in revenue. While the food products segment generated N42.6 billion (48 percent), the home and personal care segment generated N46.09 billion (52 percent) of total sales. But it chooses to leave to “strengthen operations with measures to digitize and simplify processes, and focus more on business continuity measures that reduce exposure to devaluation and currency liquidity in our business model,” the company said.
