As with many other parts of the world, Nigeria is having to cope with high inflation, the difference being that Nigeria’s inflation has been persistently high for years. This has forced producers of household products to adopt 'sachetisation' as a survival tool.
Sachetisation means the repackaging of goods into smaller quantities (such as sachets, packets and small bottles) in an attempt to make them portable and convenient to use, and, most importantly, affordable for consumers without the resources to buy the product in its original size.
It is typically a response to poverty, and this has been the case in Nigeria. In recent times, we have seen increased sachetisation of various household products. Tampons, for example, are available in packs of just two, spirits are now packaged in sachets and smaller PET bottles, even disinfectants, are sold in sachets of 15ml.
Power to the poor
The last poverty report (2019) from Nigeria's National Bureau of Statistics (NBS) estimated that 80mn Nigerians were living on less than NGN380 (which was then US$1, now far less) per day. Since then, inflation numbers have been terrible, averaging 15.8% in 2021.
Nigeria is not the only country dealing with inflation – it is a global hot topic, of course – but Nigerians really can’t afford it: c57% of their household expenditure already goes towards food.
With c40% of the population living below the poverty line, sachetisation – particularly by the fast-moving consumer goods companies (FMCG) and, lately, even the brewers – is increasingly necessary to meet growing demand from the bottom of Nigeria's social pyramid.
And even the sachets themselves are getting smaller. Rising input costs because of inflation have forced companies to reduce the sizes of their existing sachet products, while others have introduced new value stock-keeping units (SKUs). All of these steps are to meet demand and maximise the opportunities for companies among the poorer population segments.
Although there is pressure on both producers and consumers, as our colleague, Nirgunan Tiruchelvam, noted in his 'Power to the Poor' report, companies that target the poor are likely to have more sustainable business models. The consensus view of Africa is that the middle classes are the principal drivers of consumer growth; however, the stark reality is that nearly 80% of the population in Sub-Saharan Africa as a whole live on less than US$4 a day. If companies are able to offer high volumes of their products in small packages, and are prepared to accept tiny margins on those small packages, "their ROE and FCF generation should be superior to peers with more broad-based and higher-up-the-pyramid business models".
Most consumer goods companies in Nigeria are now catching up with the trend and selling more products in smaller sachets. The likes of Unilever and Nestle (which rank high on Nirgunan's Productive Exposure to the Poor metric) continue to sell seasoning cubes, tea bags and cereal in smaller packs. Nestle, in particular, offers smaller sachets across its product suite – from chocolate drinks to baby foods. That being said, given it is such as common strategy now, it may no longer provide a competitive advantage.
The slippery slope – spending more to buy less, more often
Sachetisation provides more affordable options, but they are not necessarily cheaper, as more packaging implies more cost for the producers. In the long run, of course, individual consumers spend more to get the same or even less quantity of the product.
For instance, a 45g sachet of breakfast cereal costs NGN110, but a 450g pack costs NGN900. So, consumers are effectively paying a 22% sachetisation premium, and getting less overall value for their scarce money.
No improvement in sight – less scope for discretionary spending
Nigeria's economic environment is leaving consumers with less money to spend on discretionary items. Even if the central bank finally starts paying attention to inflation and adjusting monetary policy accordingly (it has chosen to prioritise growth and currency stability – which it is failing at – over price stability), Nigeria still has a serious battle on its hands to get inflation down to single digits, because of structural issues affecting production and logistics.
Moreover, Nigeria’s GDP per capita has been declining since 2015, and do we not expect that trend to change – the meagre GDP growth forecast of 2.7% in 2022 remains below the rate of population growth.
Terrible for the environment (the 'E' in ESG)
A related issue is that although developed countries are promoting environmentally friendly packaging such as paper and encouraging a refill culture, this is not a conversation that Nigerians are seriously having yet.
The country already generates a high volume of plastic waste, with a grossly inadequate disposal system. And, although the government recently banned the production of alcohol in sachets and bottles of less than 200ml, there is no legislation against sachetising other products yet.
With the accelerating sachetisation trend and little effort to improve waste disposal, the 'E' in Nigeria’s ESG should be thoroughly scrutinised.
Power to the poor (Nirgunan Tiruchelvam and Eronmosele Aziba)
The ‘E’ in ESG: 4 charts on plastic waste in emerging markets (Hasnain Malik)