Murphy: There is Increasing Optimism about the Nigeria Economy

MONDAY INTERVIEW

The Chief Executive Officer of Mouka, Ray Murphy, x-rays the current state of Nigeria’s economy, expressing hope that the country is coming out of the woods. He also spoke on the business strategy his company adopted to remain afloat at the peak of the recession last year.  Chinedu Eze presents the excerpts: 

The economic recession has adversely affected the activities of most manufacturers; to what extent, would you say the recession impacted on your bottom line?

Obviously 2016 was an extraordinarily challenging year but I think after 20 years of consistent average of 3, 4, 5 per cent  GDP growth in Nigeria, I think it is the first time in 20 years that we went negative  and the country actually went into a recession. How did that impact on Mouka? I would like to think that we bucked the trend a little bit, as the country went into recession that was the time when Mouka was actually reinvesting in our business.

I can explain what I mean by reinvestment. Throughout 2016, we very much took the view that we had to focus on three key areas. First of all was the Nigerian consumer, when the Nigerian consumer was being seriously affected by the recession  and disposable income had decreased throughout 2016, many companies cut their marketing budget back to the  core and stopped communicating with consumers. We did the reverse; we significantly increased our market spending and actually started communicating even more with our loyal and new Mouka consumers. And that was one of three reasons why I think we buck the trend in 2016. Secondly, we also revisited the quality of our product. When you go into recession many companies cut pack sizes and cut the formulations of the product. Now, we went the other way and we can clearly demonstrate that we have consistently improved the quality of our product over the past 18 months. So, first of all, communicating with the consumer, and then secondly giving an absolute cast time guarantee of quality, not cutting corners, not cutting pack sizes.

Third point was how do we reach our loyal consumer base? Now we partner with around 250 loyal distributors in Nigeria.  So again we laid down a serious plan with them, a series of support plans with them which actually strengthens their business. And throughout 2016, basically we fulfilled our promises. We measured the beginning of the year basically what our distributors thought of us and we measured the end of the year what they thought of us and we were able to detect a very distinct improvement in our customer service measures.

Basically we said Mouka is fulfilling its promises, is doing what it says it would do. And then I think probably the fourth and probably most important area is the Mouka people.  You know, one cannot have a successful people business without a strong loyal workforce. And I think obviously collectively the Mouka people made a big, big, difference in 2016. Many companies were retrenching, cutting back on production, laying off employees etcetera. Throughout 2016 we didn’t lay off anyone, if anything, our head count actually increased and we also increased our training budget fourfold throughout 2016. So I would say that what while many companies were negatively impacted by the very serious conditions in 2016, we actually saw it as an opportunity to continue investing in the four key areas I have just mentioned.  And it was through continued investment that I think we reaped the reward in 2016.

Are you saying it did not affect your margins?

Our margins remained at the levels at which we expected.

The major thing that characterised the recession was forex scarcity and that was the major problem most manufacturers had, are you saying you were not affected by the issue of forex?

We were affected, yes, but we developed tactics and strategies to help us manage the forex situation. You know 2016 was very much a game of two halves, pre-June 2016; the exchange rate to the dollar was N200 to the dollar. Third week of June there was an adjustment in the exchange rate and how the mechanics through which one procured forex changed, first half to second half.  So we had strategies in place for the first half of the year which we had to adapt and be very agile and change those for the second half of the year. So yes we did face forex challenges but again as a company we were very, very agile and trying to overcome those forex challenges. For example, on the second half of the year there were some of the financial derivatives available to companies in terms of forwards and futures. And some of these were very relatively new products to the average Nigerian treasury manager but we got ahead of the game quite quickly. And again that is a major attribute, going back to the Mouka people, our finance department, our treasury department, we are quick minded and very, very agile and this helped us to some degree to mitigate the forex scarcity challenges. It was an issue but we were ahead of the game and because of that we successfully addressed those challenges.

Some companies became innovative because of the recession, what segment of your business didn’t go down on demand through the demand and supply principles? What do you import? Did you continue to import or you began to look for local substitutes?

In terms of the polyester, which is the core of our mattress, I wish we could have been able to procure two key chemicals, which are used in the manufacture of mattress, locally. They are petrol derivatives and they have to be procured internationally. But almost all of our other raw materials from textile to packaging and a number of other raw materials are all locally procured and we will continue to do with that local strategy. In value terms we procure about 40 percent of raw materials overseas; because the majority of my cost is related to import oil derivative chemicals.

It was important that we have a strong strategy in place to mitigate the impact of forex. Going back to your first question, in terms of quality, it is non-negotiable in terms of compromising on quality. We know what others have done in terms of downsizing product or playing around the formulation to cut cost, and therefore certain products won’t last as long as it should last. We will not compromise our relationship with our loyal consumers by giving them a cut down quality or substandard product. That is a short term measure that will lead to a short tern result, which will have serious implications in the long term. So it is non-negotiable in terms of compromising quality.

How do you manage the issue of electricity?

In terms of power, we have got the office here and three manufacturing facilitates and all four of those areas have primary and backup generators.  So we are not dependent on the main grid. Obviously the main grid in terms of cost is cheaper than running your own generators. But we have built an infrastructure, we have built our product cost based upon self-generation of power and anything that we get through the main grid is actually a benefit but we are not dependent upon it.

Government is about expanding Export Expansion Grant (EEG), what is your view on this?

First of all we don’t have any plans to directly export at this stage. We all know that the product that we produce are mattress, a big bulky product  and the freight cost of transporting that over land makes it prohibitively expensive to export. However, while at the moment 100 percent of our revenue is in naira from Nigeria, we do have aspirations to extend our foot print in West Africa and beyond, but I think that would come less through export and more through looking at opportunities to setup in other countries or even merge with companies in other countries. I think that would be the strategy for extending our footprint.

The government has said that we are likely to exit recession by end of June; do you see signs of exiting the recession?

Interestingly we met on this very subject yesterday with some of the banks. I think over the last couple of months everyone can see an increasing level of optimism. I think everyone is of the general view that things are bottomed out and there are the green shoots of recovery in the air. We can see in terms of what the government and central bank have done in recent month and even this last weekend in terms of the new forex window that things are looking a lot more optimistic for the second half of 2017. And that is very much our view, we are optimistic, and we are looking forward to second half of the year being much stronger than the first half of the year. And then sustainability and beyond, because as a manufacturer I think the challenge is volatility and this list of stability, we can plan and you know volatility makes planning very, very difficult. That is volatility in terms of exchange rate, inflation and GDP growth. When you have volatility it makes planning difficult. When you have some stability then you know one can plan much better and execute much better.

What are the indices you think that indicate that Nigeria’s economy will grow stronger in the second half of the year?

I think the indices that would indicate it strength include the fact that inflation is no more sitting at17 percent, but declining; I think that would decline quit rapidly in terms of inflation. We have seen a spike in the past year. So as inflation comes down it increasingly becomes more of good news in the economy. If I picked up the papers almost every day last year, it was pessimism and bad news; now we are getting much more optimism and good news and that flips through to the consumer, and that gives the consumer a lot more confidence. We saw a lot of spike and increase in unemployment in 2016 that hits consumer confidence. They would of course think, “I cannot go on and spend today because I might lose my job tomorrow.”

What is the distribution network for your products, considering the poor road infrastructure?

First of all we manufacture in Lagos, Benin city and Kaduna, we have three manufacturing plants and it is from those manufacturing plants we primarily service our distributors.  We have two small depots, one in Aba and a second one in Kano. And we are actually formulating plans at the moment to see how we can get much closer, by way of geography proximity to our distributors. This is because we are dependent upon them coming to us and we provide them free transport, free subsidies etcetera. But if it is a partnership we need to get closer to them, that is something that we are looking at and actually discussing with our distributors how we can better balance it, how we can make life easier for them, is something that is under discussion at the moment. I would say that it is no secret that we are looking at opening up more depots.

Recently Mouka was recognised by the London Stock Exchange). What does this mean to you?

I think for us it is a tremendous honour to be recognised internationally for the performance of the company within Nigeria. It is a tremendous honour. We were contacted several months back by the London Stock Exchange, they were putting together this programme of companies to inspire Africa and they identified companies with some criteria. I think the first is exponential growth, so we were one of a select band of companies, not just in Nigeria but throughout Africa, which are recognised for their successes and we were asked to participate in this ‘Company to Inspire Africa initiative.

The companies selected are about 300 around Africa which were identified but out of that 300, nearly 60 of them were in Nigeria and Mouka was one of those selected in Nigeria. So we were asked to be at the forefront of the events and I attended the inaugural event in London a few weeks ago, which was a remarkable event because it was significantly over subscribed. They were literally queuing in the isles at this inaugural event in London. So from there the London Stock Exchange is on a road show in Africa, they were in Abidjan earlier in the week, they were in Lagos last night (April 27), they will be in Casablanca in a few weeks’ time, I think they will be in Nairobi as well.  And it is really to get Africa back on the agenda of the investment forum.

There are a number of many notable successes within Africa but then most specifically in Nigeria, there are a high number of very notably successes within Nigeria despite gloomy economic performance of 2016. When one looks strategically at a five or 10 years period there are going to be bumps on the road or along the way and one cannot be distracted by one year or 18 months disruption, you got to look strategically and I think that is very much the view that London Stock Exchange group has taken in terms of companies to inspire Africa initiatives in Africa. We are going to have different countries at different stages of the economic cycle at any time but let’s take the long term view.  So we felt humbled to receive that recognition of being a company to inspire Africa, one of the top performing companies in Nigeria.

What are you expected to do under this initiative?

It is really to build the profile, open up awareness of the investment communities of the opportunities in Africa. And I see myself as an ambassador of opportunities within Nigeria. It is to really do whatever we can to increase the profile or to bring in investment into Nigeria. That is what it is. What the London Stock Exchange is looking for is that the companies to inspire Africa is to focus naturally on private companies because they want to encourage investment, they are also looking to support these companies to grow  and you need capital to grow or maybe to list on the Nigerian Stock Exchange or even list on the London Stock Exchange, and I think yesterday there was a resigning of a partnership group between London Stock Exchange  and the Nigerian Stock Exchange, which partnership has been in place for quite some time. So it is to increase awareness of investment opportunities, to get capital inflows going again but obviously, as companies grow they need further levels in capital.

As London Stock Exchange is doing this, is there any role government should play in inspiring companies like yours to inspire African investments?

Yes, naturally there is a role for government partnership in partnering with private companies and I think that as we move out of recession and we move forward, government will be able to help come up with a series of initiatives to enable growth. However, as a privately owned company, we are not going to wait for government whether it is in Nigeria or any other country in Africa or even in Europe. Let’s not wait for government, just go ahead and do your own thing you own way but work with government to help derive a series of initiatives that will support government private company partnership. I am not going to wait; we will keep pushing ahead and doing our own thing.

With this international recognition I want you to review the market in Nigeria and the projections with our population, how do you see the future of the mattress industry?

In every four African there is a Nigerian, 25 percent of almost the population of the continent is Nigeria. We are getting an increasing level of urbanisation; people are moving from the country sides to the inter-towns or cities. We have a big young population in Nigeria, we got population growth, there is a growing middle class, some of the economic indicators I am looking at yesterday are suggesting an improving consumer disposable income, so all the fundamentals of growth population, urbanisation, GDP per capital growing, disposable income growing, an increase in consumer spending, all those fundamentals are there and increasingly I go back to the stability I was talking about earlier, those are all the catalyst to attract foreign investment.

But while I am here those are all the indices that give me confidence and that the right thing to do is to continue to invest because there is an expanding market opportunity out there  and that is true; not just for the Mouka brand, I think that is true for all manufacturers of consumer goods.

How do you manage competition with other industries?

Firstly for Mouka consumers, we offer products in all prices brands, we got a luxury of category of products that we make available. We have also got product that is the middle price brand; it has market, prestige products and then we have the economy sector of the market, if I can call it the value proposition. So we got a product offering which is reachable for all Nigerian consumers regardless of their income point. We compete in all point of the market, yes there are some small relatively low priced local players but we have got national and improving reach of distribution. We have distribution partners where we are talking directly with the consumer. As I mentioned earlier, we have significantly improved our marketing investment, it means that we can reach all consumers at all price points.

What is your short term and long term expansion plan?

As we continue to grow from a manufacturing capacity perspective, we start to grow out of our current capacity and that is one of the mid-term challenges that we face, which is how and where we are going to increase our manufacturing capacity. And we are actually currently working through some feasibility in terms of how and where we build to that additional capacity.

How were you able to hold on to your workforce despite the fiscal challenges in 2016?

Yes; as other companies retrenched we retained. And what we are doing today is not possible without Mouka people and I can underline that. When I look at Mouka our total head count within the company is up to 800 people and one expatriate. And I think that is commendable to say that Mouka is 99.999% true indigenous Nigerian company, manufacturing Nigerian product for Nigerian consumers. And as I keep saying it is the Mouka people in partnership with the Mouka distributors that are really meeting the needs of the loyal and new Mouka consumers. But Mouka people are in the heart of it.

In the next five years are you likely going to increase the number of raw materials you source locally?

Well, as we continue to grow naturally we continue to increase our procurement needs and be procuring locally. We are actually working at one of the initiative at the moment. As you mentioned local procurement is there are some small and medium local enterprises which find liquidity quite a challenge. They could grow the business but they don’t necessarily have the capital to grow the business. And we are actually working with one finance partner to see how we can help some of our small SMEs suppliers to improve the liquidity of their business. Talking earlier of how we partner with our distributors; that is obviously on the route to market side, but the supply to Mouka side in terms of local suppliers, we are looking at a number of initiatives there. We are actually piloting one of them at the moment in terms of how we can help improve their liquidity so that they can strengthen their businesses and that brings us back to sustainability. You know talking of changing suppliers; we would rather build long term supplier relationship.

How have you been accessing funds?

If I look back to the beginning of 2016, I would say when I was entering the fourth phase because if you look back to the first half of 2016, the modus operandi through which one procured funds at that time was primarily through your bank and through CBN. Post June 2016, it was a completely different scenario into the importation of derivatives I mentioned earlier, the forwards and futures that is regarding to the beginning of this year, there is a slightly changing scenarios. And now we are into a new phase, post late February when CBN started making more forex available to the market and then with a new forex last week end.  So going back to the point I made earlier, one has to be able, agile and ahead of the turf in other to gain from the opportunities when they become available. But where we are today is significantly different from where we were this time last year in terms of the procurement of forex. Those who stood still have suffered, those who tried to get on board and get ahead of the game are actually benefiting from the situation.