Over the last few years, the Nigerian economy has experienced a series of reforms and restructuring in key sectors. These reforms include the Financial, Petroleum, and Power Sectors, among others. The financial sector reform has been the most noticeable, as banks and insurance companies have been mandated to recapitalize in line with government regulatory requirements.
The telecommunications industry also underwent a significant transformation with the introduction of the general system for mobile telecommunications (GSM) in 2001. The deregulation of the downstream petroleum sector and the privatization of many previously government-owned parastatals represent some of the structural changes that have occurred in recent years.
A noticeable trend in the economy’s growth pattern is the increasing contribution of the non-oil sector, particularly the agricultural and manufacturing sectors, to the nation’s GDP. In the years ahead, other key sectors such as construction, consumer goods, and tourism may begin to play more significant roles in economic growth and development.
As the ongoing economic reforms continue to reach other segments, a more balanced and self-sustaining economy is anticipated in the future.
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Nigeria’s Milling Industry
1. Animal Feed Milling Industry
In the animal feed milling industry, various materials such as cereals, coarse powders, fine powders, mash, bran, liquids, and molasses are milled, fed, weighed, and mixed with additives to obtain the final product. Corn, sorghum, wheat, and barley are the most commonly used cereals in feed preparation for the livestock, poultry, swine, and fish industries.
Roller and hammer mills are the two types of processing equipment generally used to grind grains into smaller particle sizes. Milling cereal grains through mechanical action involves several forces, such as compression, shearing, crushing, cutting, friction, and collision.
The particle size of the ground cereal is essential in animal feed production, as smaller particle sizes increase both the number of particles and the surface area per unit volume, thereby enhancing access to digestive enzymes.
2. Flour Milling Industry
Feed milling involves a combination of processes used to produce food for fish, animals, or human consumption. The Nigerian flour milling industry comprises many players segmented by their installed capacity.
The top two players have an installed capacity of approximately 11,000 metric tons per day and control over 65% of the market. Given the industry’s high fixed-cost regime, profitability largely depends on the ability to increase production volumes.
Shortages of cassava flour and surging wheat prices in the global market are affecting the operations of flour milling companies in Nigeria. In this industry, nearly 90% of the raw materials are imported because Nigeria’s climate is unsuitable for wheat production. The rising price of wheat is, therefore, a major challenge, with a ton currently priced between $180 and $240.
Another challenge is the low capacity utilization and erratic power supply from the Power Holding Company of Nigeria (PHCN). Rising prices of refined products have also increased general overheads, as many manufacturers rely on alternative forms of power generation. These financial pressures contribute to the relatively high cost of doing business in Nigeria.
Wheat consumption in Nigeria, at 69 grams per capita, is among the lowest in developing economies. However, with a population of over 140 million and a projected growth rate of 3%, there is significant potential for growth in flour consumption.
This potential, however, is influenced by factors such as inflation rates, availability of substitutes, tariff policies, and government regulatory requirements, which may hinder the supply capacities needed to meet increased demand.
Currently, there are 21 flour milling companies in Nigeria. Unfortunately, about 80% of the market share is dominated by just six firms, leading to a disparity between the larger players, mid-sized firms, and smaller companies. The six major players by market share include:
- Flour Mills of Nigeria Plc
- Dangote Flour Mills Plc
- Ideal Flour Mills Ltd
- Honeywell Flour Mills Ltd
- Standard Flour Mills Ltd
- Crown Flour Mills Ltd
The stronghold of the market by these six companies creates invisible entry barriers for prospective flour millers. Keen competition exists within the various tiers of the market, with occasional movements between the small and mid-tiers. However, a significant gap remains between the top-tier companies and others in the sector.
The flour milling industry in Nigeria has a total installed capacity of over 22,000 metric tons, with Flour Mills of Nigeria controlling approximately 38%. Other top producers by installed capacity include Dangote Flour Mills (18%), Honeywell (7%), Ideal Group (14%), and Crown Flour (8%).
Industry Characteristics
The Nigerian Flour Milling Industry is characterized by many key features that distinguish it from other sectors of the economy. With turnover and earnings driven primarily by market share and capacity utilization, the major determinant of success among its players is organic growth. A summary of these features is outlined below:
1. Stiff Competition: The level of competition within the industry is extremely high. Success for each company depends on its ability to gain market share. Industry players go to great lengths to increase capacity. As an oligopoly, the pricing is determined by the Flour Millers Association, which sets a fixed price that producers are not allowed to exceed. However, this fixed price is often violated, especially by companies that control a significant share of the market.
2. High Volumes: The Flour Milling Industry is volume-driven, with producers striving to increase capacity to boost production and sales. Due to high overheads resulting from heavy cost burdens, margins within the sector are relatively thin. As such, earnings are determined by the ability to increase sales. Therefore, the more profitable firms are those capable of out-producing the competition while keeping costs relatively stable.
3. Heavy Cost Outlay: The Flour Milling Industry relies heavily on imported inputs. The basic raw material for flour processing is wheat, and it is estimated that about 97% of the wheat used by flour milling companies is imported. High tariffs imposed on imports result in a high cost of producing flour in Nigeria. Many prospective companies are either forced out of business or struggle with thin margins, making it difficult to compete effectively.
4. Seasonal Variation: Seasonal variation is prevalent in the industry. Demand for wheat-based foods is typically higher in the dry season (between March and September), while the wet season is characterized by demand for cheaper substitute foods such as maize and groundnuts, which are more readily accessible.
The strategy, therefore, is to capitalize on peak periods by aggressively growing volumes while reducing output during off-peak periods, in line with the forces of supply and demand.
5. Price-Sensitive Demand: As a staple food with many substitutes in the consumer goods industry, flour products exhibit high elasticity of demand. Any slight increase in price could lead to a significant decrease in quantity demanded, as consumers shift their preference to cheaper substitutes.
Quality control standards are crucial in the flour milling industry, with producers constantly improving the quality of their products to retain customers. The demand for flour is influenced by factors such as quality, price of substitutes, seasons, and other exogenous factors.
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Critical Success Factors
1. Capacity: A major critical factor for the success of flour millers is capacity. In this volume-driven market, the ability to constantly increase production capabilities distinguishes the more successful players from the less successful. The ability to increase capacity is also directly related to market share, ultimately leading to greater output and profitability.
2. Marketing Strategy:Aggressive marketing is a significant factor for the success of flour millers. Being a manufacturing-related industry with intense competition, large resources are allocated to promotions, advertisements, and general publicity.
Various media channels such as print (newspapers and magazines), electronic (TV, radios, and internet), billboards, and sponsorship of events/programs are used. These efforts create consumer awareness, leading to greater patronage.
3. Adequate Distribution: An effective and efficient distribution network is crucial for the success of flour millers in Nigeria. Since flour is consumed across the country, it is essential for the product to reach the final consumer when needed. Producers should ensure a higher presence in areas with heavy demand for flour. An adequate distribution network complements the productive and marketing strategies of companies.
4. Good Management: As in any industry, the quality of the management team is an essential ingredient for success. The track record, experience, and competence of top management largely determine the ability to grow volumes and margins. Many flour milling companies are owner-managed, which places the responsibility on the owners to clearly distinguish family from business. Competent staff should be employed in strategic units to ensure a positive impact on the company’s bottom line.
5. Adequate Storage Facilities: Wheat is a perishable commodity, making adequate storage a key success factor. Proper storage reduces losses and wastage due to spoilage and deterioration, helping to reduce the overall cost burden and improve profitability.
Storage facilities should be situated close to distributors to reduce turnaround time and save costs. In addition to ensuring the quality of the facilities, measures should be taken to keep them safe from theft and pilfering.
6. Pricing: Pricing in the flour milling market is regulated primarily by the Flour Millers Association. However, larger players tend to set prices higher than the fixed price to increase margins and grow profits. Given the high production costs, most producers generate additional income through optimal pricing of their products.
Challenges & Risk Factors
- 1. Regulatory Environment: Strict regulations, import duties, taxation, and levies increase production costs, reducing profit margins.
2. Lack of Sufficient Infrastructure: Poor power supply, inadequate water, and poor road networks raise production and distribution costs.
3. Low Demand for Wheat: Nigeria’s wheat consumption is low compared to other countries, creating supply-demand gaps.
4. Continuity Issues: Many flour mills are owned by individuals, making them vulnerable to financial crises if ownership changes due to death or incapacity.
5. High Cost of Operations: Initial setup costs are high, making it difficult for new or small-scale entrants to compete.
6. Foreign Exchange Fluctuation: Reliance on imported wheat exposes millers to exchange rate risks.
7. Inflationary Pressures: Rising consumer price index increases operating costs, though recent economic recovery shows signs of stabilization.
Types of Machines
1. Hammer Milling: Used for particle size reduction in feed ingredients like corn. Advantages include a wide range of particle sizes and ease of use. However, it’s less energy-efficient than roller mills and can generate dust pollution.
2. Feed Mixers: Available in vertical and horizontal types, these machines are used to properly blend feed ingredients. Vertical mixers are common but less effective for moist feeds; horizontal mixers are more efficient but harder to clean.
3. Pellet Mills: Compress soft feed into compact pellets, ensuring uniform nutritional value. Conditioning units are often added for improved pellet quality.
4. Extruders: Used to produce floating and sinking feeds, particularly in aquaculture. They improve feed digestibility but are expensive to purchase and maintain.
5. Crumbler (Pellet Feed): Breaks pellets into smaller particles, used for feeds requiring finer texture.
6. Dryers (Pellet Feed): Reduce moisture and temperature in pellets for proper storage. They come in horizontal and vertical designs.
Other Types of Milling Machines
Other types of milling machines include:
1. Column: Basic design used for simple metalworking tasks like drilling.
2. Turret: Versatile and commonly used for a range of products.
3. C-frame: Sturdy, hydraulic-powered machine for industrial use.
4. Horizontal: Runs parallel to the ground for specific metalworking tasks.
5. Bed type: Eliminates the knee part, allowing longitudinal movement.
6. Planer-style: Similar to bed type but with additional features for broader milling actions.
7. Tracer controlled: Ideal for reproducing parts based on master models, widely used in the automotive industry.
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Frequently Asked Questions
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