Local soap manufacturers have seen their margins shrink by a quarter over the last three years, on heightened market competition from imports from Egypt and reduced buying power among consumers due to inflation.
Market fragmentation has also seen local manufacturers enter into pricing wars in order to gain market share.
PZ Cussons Managing Director for Kenya and Ghana Sekar Ramamoorthy told the Business Daily that Egyptian fast moving consumer goods (FMCG) exports have become cheaper due to the country’s currency devaluation.
“Margins have eroded by up to 25 percent for fast moving consumer goods, of which soap is one of the biggest products. Competition from the region and higher import costs, including on packaging material are a factor,” said Mr Ramamoorthy.
When a currency depreciates, production costs for a country’s domestic manufacturers tend to be lower relative to foreign competitors, making exports more competitive.
A Kenyan trader importing products from Egypt would for instance be able to buy more products per dollar due to the currency devaluation of the Egyptian pound—given that companies price their products in local currency.
“Previously, Kenya had a stable tax regime on vegetable oil to keep a low cost base, but now we are paying excise of 10 percent on the product. 70 percent of soap cost is vegetable oil, meaning that soap has become a luxury,” said Mr Ramamoorthy.
“But in Egypt it is not charged excise, so multinational manufacturers are finding it cheaper to move their manufacturing there, and because of the devaluation of the currency, their exports become even cheaper.”
He added that due to Kenya and Egypt both being members of regional trade blocs such as Comesa, Kenya can’t impose a tax on these imports of soaps, lotions and cosmetics, hence import traders have an advantage over local producers.
The Egyptian pound has depreciated by 57 percent against the US dollar this year, largely due to a devaluation carried out in March, as the country shifted to a more flexible exchange rate in order to secure a $8 billion funding programme from the International Monetary Fund (IMF).
Manufacturers seeking to move their operations to Egypt have also been attracted by cheaper power, even though the country has been rolling back electricity subsidies.
According to the Kenya Association of Manufacturers (KAM), the past decade has seen 34 manufacturing firms in various sectors shut down production plants in Kenya, signalling that the country has been losing its competitive edge compared to African peers.
Egypt and South Africa have taken up most of the manufacturing opportunities from Kenya, with KAM blaming high and unpredictable taxation, increased cost of power and competition from imported finished products- for the problems facing the local manufacturing sector.
