Firms feel acute inflation bite – Business Daily
Kenya Association of Manufacturers (KAM) chairman Mucai Kunyiha. FILE PHOTO | NMG
Runaway inflation, new taxes and depreciation of the shilling have hit hard manufacturers of fast-moving consumer goods, who are now warning of reduced profitability which will lead to job losses.
This comes on the back of price increases for basic goods in recent months amid largely stagnant real pay. Some of the leading fast-moving consumer goods (FMCG) manufacturers now say higher prices — largely due to global inflation emanating from supply chain disruptions and elevated fuel costs— have cut demand for products, hitting their earnings.
“This is the first time that demand has dropped between 15 and 20 percent because of an increase in prices which has reduced consumer buying power in the marketplace. This is having a cascading effect on the manufacturing profitability and affect the health of businesses,” Sekar Ramamoorthy, managing director for PZ Cussons East Africa, told the Business Daily.
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“Inflation is the biggest challenge in Kenya. It is a very difficult situation which the country has not gone through for many, many years.”
PZ Cussons are the makers of Imperial Leather soap and gel brands, hygienic brands suh as Carex and Morning Fresh as well as beauty products Venus, Sanctuary Spa and St Tropez.
Kenyans are experiencing the sharpest rise in inflation — a measure of the cost of living — in five years. Inflation jumped to 8.3 percent in July, the highest since June 2017 when it hit 9.21 percent, according to the Kenya National Bureau of Statistics.
Russia’s invasion of Ukraine exacerbated disruptions in global supply chains, raising competition for raw materials for Kenyan factories amid soaring cost of fuel and difficulties in accessing adequate dollars to pay foreign suppliers on time.
The challenge has been compounded by a weakening shilling which has shed 5.3 percent of its value against the bullish US buck.
Firms say the average cost of raw materials has bumped by half, a sharp climb in input expenses which cannot be passed onto the consumers as a whole. That would result in a loss of market share to competitors amid falling demand because of eroded consumer purchasing power.
Manufacturers say they have passed between 30 and 60 percent of the increased costs onto final consumers.
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“Every time the cost of inputs goes up, it erodes our margin, and we are not able to recover the full cost from price increase alone because we are also constrained by the market dynamics and competitor pricing,” Mary-Ann Musangi, managing director of Haco Industries, said via email.
“So, we are not at the moment, implementing a full cost recovery due to these sensitivities.”
Haco makes personal care products such as Amara Lotion and Miadi as well as homecare items such as So Soft fabric softener and Ace liquid toilet cleaner.
The Kenya Association of Manufacturers, a lobby, reckons the soaring cost of raw materials has been the main driver of the cost of doing business this year, stunting the sector’s growth and thinning its contribution to the gross domestic product (GDP).
The sector’s contribution to the GDP — a measure of national economic output —has been falling for five years at least, according to the State-run statistician.
Last year, the manufacturing sector’s share of the GDP fell to 7.2 percent from 7.6 percent in the prior year, less than half the 15 percent target under the Integrated National Exports Development and Promotion Strategy of 2018.
The shrinking share of economic output is largely due to the sector growing at a slower pace than other economic sectors, especially services. Central Bank of Kenya (CBK) governor Patrick Njoroge in May described last year’s 6.9 percent growth for the sector against an overall economic growth of 7.5 percent as “disappointing”. The sector’s growth was a recovery from a contraction of 0.4 percent in 2020.
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“Given the possibilities, this [growth for the manufacturing sector] is still a low performance. Manufacturing needs to do better than this,” Dr Njoroge said in May.
KAM’s head of policy and research Job Wanjohi said the greatest input cost push has been felt by firms which rely on crude palm oil — used in the processing of cooking oil, soaps and cosmetics with glycerin—, wheat and raw materials for the steel and paper industries.