Kenya’s manufacturers have quietly been devising strategies to mitigate operating expenses and stimulate sales in the face of falling consumer demand as a result of elevated living costs amid negative real earnings for workers.
High inflation at a time when employers have frozen pay raises has also negatively impacted producers of goods, making them rethink marketing and expansion strategies.
Manufacturers are battling cost pressures emanating from new and higher taxation measures as well as increased cost of fuel and a surge in electricity bills.
Firms are grappling with costly raw materials as a result of lingering global supply chain constraints amidst a persistently depreciating shilling against major global currencies.
The overall cost of doing business has increased as much as a third in the last 12 months, according to manufacturers who responded to our enquiries.
However, a majority of the firms have been forced to pass a fraction of additional costs onto consumers, leaving them with a significant portion of the expenses.
This is happening at a time when consumer spending power has fallen to the lowest levels, at least in the last decade, largely due to a confluence of general growth in prices of goods and services and a raft of new and additional taxes on pay slips.
Findings of Stanbic Bank’s Purchasing Managers Index (PMI), for example, suggest that Kenyan firms posted month-on-month growth in new orders in two of the last 12 months — the exception being January and August.
That points to the longest-falling trend in sales in PMI history dating back to January 2014.
The monthly PMI report is a product of feedback from 400 panellists drawn from key economic sectors of manufacturing, agriculture, construction, wholesale and retail, services and mining. “We are seeing increased unpredictability in demand in this environment of high inflation and, therefore, we have increased promotional campaigns and discounts to stimulate demand,” said Manoj Shah, the founder and chairman of Osho Chemical Industries Ltd.
Osho is a manufacturer, marketer and distributor of agricultural inputs, industrial chemicals, veterinary products and livestock nutritional supplements.
Manufacturing and construction firms have been hit hardest by rising costs and flagging sales, the analysis of survey data says.
Factories, however, fear passing the entire cost onto consumers would result in a loss of market share to competitors, cutting margins.
“We should be passing on everything but the end result is that affordability levels then don’t allow for people to buy,” Rajul Malde, the commercial director at Pwani Oil, said in December. “Therefore, if we did that [pass entire costs to consumers], there would be impact on volumes and that means sales go down and production reduces.”
So how are businesses, especially fast-moving consumer goods (FMCG) firms, navigating the increased production costs and falling demand to deliver returns for shareholders?
Firms are increasingly resorting to product re-engineering or modification which may involve removing some ingredients from a product while maintaining the same price and reducing the size of products.
Other coping mechanisms against cost pressures include prioritising export sales and importing cheaper finished goods as opposed to local manufacturing.
Kenyan firms, just like their global counterparts, have over the years been quietly downsizing product packages and sizes, ensuring they achieve price increments without changing price tags on the shelves.
Some of the products whose sizes have been reduced, technically called ‘shrinkflation’, in recent years include toilet papers, baby diapers, chocolate bars, confectionery and bread.
Manufacturers usually resort to ‘shrinkflation’ when customers become more price-sensitive and are likely to go for cheaper alternatives if the prices of their preferred brands are raised. The coping mechanism is used to recoup higher costs of products such as ingredients, packaging, labour and transportation.
“For us, we have also reduced expenditure on administration and marketing campaigns, and we are also going lean on staffing and recruitment,” said Bharat Shah, the chairman of Kenafric Industries which processes confectionery, biscuits, culinary and powdered juices.
The cost mitigation mechanism is increasingly being adopted by manufacturers at a time when upper-middle and high-income households with monthly income in the upwards of Sh300,000 are gradually dropping premium products from shopping baskets, according to a last year survey by research firm Ipsos Kenya.
Manufacturers, wholesalers, and retailers are grappling with cash flow hitches on reduced demand for goods, reflecting the deteriorating pace of business activities. PHOTO | SHUTTERSTOCK
Households are using this as part of the mechanism to cope with elevated living costs.
“The kadogo economy has sprouted in the middle class, a phenomenon that was only attributed to the bottom of the pyramid population. Many households are replacing fully packaged items that have become completely exorbitant with smaller dispensable quantities that serve daily needs,” Antony Mwangi, the chief executive of Kenya Association of Manufacturers, said in June last year.
“Many supplier outlets have been faced with increasing demand for dispensers for key household items say edible oils, milk, and powdered soaps, among other items, according to need.”
To stimulate demand, firms are increasingly introducing value packs and discounts.
To mitigate the rising cost of doing business, manufacturers have called on the Ruto administration to consider cutting taxation levels and reducing government fiscal expenditure to compensate for the resultant revenue hole.
They also want the reintroduction of manufacturing growth stimulus such as discounted electricity tariffs and timely payment of value-added tax on exports to improve cash flow positions for firms.
The government has pledged to institute policies, which will expand the manufacturing sector’s contribution to the gross domestic product — a measure of all economic activity by individuals, companies and government — from 7.8 percent in 2022 to 20 percent by 2030.
Dr Ruto’s ‘Kenya Manufacturing Agenda 20 by 30’ aims at maximising “opportunities available to spur local industry’s growth”.
The sector’s growth has, however, been modest, expanding 2.0, 1.4 and 2.6 percent, respectively, in the first, second and third quarters of 2023, well below the projected double-digit growth under the Manufacturing Agenda.
“The manufacturing sector has an ambitious plan to increase the sector contribution to GDP to 20 percent by 2030 whilst promoting value addition in the sector. Several constraints hinder the realisation of these goals,” Mr Mwangi said via email.
“These include regulatory overreach and associated burden; high levels and uncertainty of taxation; high cost of utilities such as electricity and water; lack of long-term financing and high-interest rates on loans; multiple levies, charges, and fees by counties; inefficient and costly logistics supply chain; and the weakening of the Kenyan shilling against major global currencies which increases the cost of imported raw materials.”
The government has adopted a value chain approach to propel the sector to the targeted levels in contributing to the economic output.
The administration has identified leather and leather products, building and construction materials, garments and textiles, dairy products, edible and crop oils and the tea sub-sector as the value chains which will place the sector onto a sustainable growth path.
“Manufacturing has the potential to create high-quality jobs and increase the standards of living in a country. Therefore, a weak manufacturing sector denies the country of much-needed jobs and revenue,” Ken Gichinga, chief economist at Mentoria Economics, told the Business Daily last October.
“Creating a low-cost manufacturing base can propel Kenya's industrial goals. This can be achieved by reviewing and creating a competitive tax policy that complements all the factors of production.”
