Between The Devil & Deep Blue Sea: Post-COVID Dilemma of Businesses in Nigeria

Six months into the worst felt pandemic in the history of the world, countries are sliding into recession, governments are forced to make tough decisions, organizations have no choice but to carry out cutbacks and price adjustments, while on the home front, families are re-evaluating their priorities in the face of uncertain realities.

The coronavirus pandemic has changed the world as we know it and it is not farfetched to surmise that things will never be the same again.

The economy is taking a beating and the effects are being felt across the board. From basic necessities to luxury items, prices of consumer goods and services are soaring, resulting in a situation where Nigerians now have to pay more for less.

In July, three months after COVID-19 had crippled economic activities in the state, the Lagos Metropolitan Area Transport Authority unexpectedly increased prices of bus fares. Addressing the chorus of queries and concerns over the move, the state government said the price hike was the only way to prevent the transport business from going under. To offer further clarity on the decision, Abiodun Dabiri, LAMATA MD, noted that the monies being expended by the operators on fuel, oil and tyre had increased by 71%, 64% and 90% respectively.

Not peculiar to LAMATA alone, price hike also surfaced in the Federal Airports Authority of Nigeria (FAAN) which recently raised Passenger Service Charge (PSC) by 100 percent for both domestic flight passengers and international travellers. Similarly, the toll rate of prepaid users accessing the Murtala Muhammed International Airport (MMIA) was jacked up by 300 percent. To cap it all up, airfares have significantly increased since domestic flights resumed in July, with some airline operators raising prices by as high as 50 percent. Reported prices of local goods indicated a significant increase in the cost per unit of these goods. A 50kg bag of rice previously sold for N18, 000 is now N21, 000, while a paint bucket of Garri that was N300 and N350, is now being sold for N1, 300.

Most of these price hikes across sectors became necessary owing to lingering revenue loss and increased cost of operations, caused in part by the COVID-19 lockdown regulations. Government regulations and the regulatory environment have also played crucial roles. For example, Lagos State’s ban on commercial motorcycles, which has greatly impacted the cost of transportation in many parts of the state and forced operators like MAX, Gokada, and ORide to cease operations.

Just last week, the Lagos State Ministry of Transportation also released new guidelines for taxi operators and ride-hailing companies like Uber, Bolt, and others. These regulations are set to be enforced from August 20, 2020. According to the guidelines, service entities in the city with less than 1,000 drivers are expected to pay a ₦10 million ($27,341) licence fee, while those with more than 1,000 drivers are to pay ₦25 million ($54,682). For subsequent renewals, operators with over 1,000 drivers are to pay ₦10 million ($27,341), while those with less are to pay ₦5 million ($13,670).

Taxi and App Operators with 50 cars or less are expected to pay a ₦5 million ($13,670) licence fee, while those with more than 50 cars are to pay ₦10 million ($27,341). The former will pay an annual renewal of ₦1.5 million (~$3,870), while the latter will renew at ₦3 million ($7,700)

It is partly for these same reasons; unfavourable regulations, revenue loss, increased cost of operations – and a 6.3 percent decline in sales – that Shoprite announced plans to sell off its stake and exit the Nigerian market.

Inevitably, the price adjustment wave has hit the PAY TV market, with operators like Startimes increasing subscription prices by about 40%. Startimes’ basic bouquet is now offered for N1,700 monthly while the classic bouquet has gone up from N1900 to N2,500. Startimes is a Chinese player, operating here on a JV arrangement with the federal government of Nigeria through the Nigeria Television Authority.

In explaining their recent price increase, the company’s Brand and Marketing Manager, Viki Liu said the price increase is due to increased value-added tax (VAT) from 5 percent to 7.5 percent as well as the foreign exchange rate which has impacted its cost of operation.
“Our business is not exempted from the effect of the naira depreciation affecting all businesses in the country. All of our foreign content is bought in dollars and to continually serve our subscribers the best content, the subscription price has to be reviewed upwards,” Liu added.

Even before the resultant effects of the pandemic were felt, businesses had started to feel the pinch of government policies. Just as COVID-19 was starting to spread like wildfire across the globe, the implementation of Nigeria’s new finance act took effect on February 1, resulting in a situation where value added tax (VAT) jumped from 5% to 7.5%. This meant that a company like Multichoice had to pay more VAT to the government on every subscription rate.

It is no wonder that industry watchers have forecasted that it is only a matter of time before DStv and GOtv, two broadcast satellite services owned by MultiChoice, raise the prices of their bouquets. As the largest PAY TV operator in Nigeria, Multichoice has been badly hit by COVID-19, owing to a mixed bag of factors.

For a PAY TV operator that has to pay for broadcasting rights in foreign currencies, the quiet but obvious devaluation of the naira has taken a toll on business. The company will now have to pay more for broadcasting rights due to the increased foreign exchange. If the company has foreign experts coming from abroad to service or repair equipment, it will also have to pay more than before – leading to increased cost of operation. And seeing as DStv decoders are not manufactured in Nigeria, more funds will be devoted to producing and importing them.

The exchange rate went from N360/$ in February 2020 to its present street value of N475/$. According to Goldman Sachs’ projection, the naira is in a volatile state and is expected to hit N550/$ within the next 12-18 months. Hence, companies like Multichoice will have to find a way to peg subscription prices against this projection to avoid a situation of unstable subscription rates as exchange rates fluctuate.

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Analysts wonder how US-based companies like Netflix, Spotify, Apple Music and Youtube will react.

Also, with 12.56% as Nigeria’s present inflation rate, it means that PAY TV operators will cough out more money for locally purchased equipment and items as well as other services.

During the lockdown, an important operator like DStv could not stop work, hence had to spend more to get staff to work and make operations run seamlessly. For example, a company like Shoprite says it spent 327.2 million rands on health and safety, PPE for staff, temperature scanners, office sanitation, employee meals, remote network access for employees, mobile clinic, security as well as special allowance for employees that had to do overtime. And that is a company that does not operate 24 hours. When evaluated, Multichoice may have spent more to keep its employees working across the continent.

And that’s not the whole shebang.

Since subsidy was removed on petroleum products, prices have begun to fluctuate monthly based on recommendations from the Department of Petroleum Resources. Companies like Multichoice, Startimes, and Shoprite will have to embrace hedging so as to factor in the fluctuations in the petroleum sector, given that they directly affect operation costs. After fuel pump price crashed to N123.5 in April, it has been at the mercy of market forces; it now hovers between N143.5 and N148. And due to the recent increase of depot prices by the DPR, analysts expect petrol price to enter N155 in coming months. Given the unreliable power situation in Nigeria, the cost of running a 24-hour broadcast service has skyrocketed.

When compared with countries like South Africa, Ghana, Kenya and Botswana where Multichoice operates, Nigeria has the worst electricity supply yet enjoys the lowest rates. In Nigeria, for example, the premium package is N16,200, which translates to approximately $41 at the present exchange rate. In Ghana, that same bouquet goes for $58, in South Africa, the premium bouquet goes for $43 while in Kenya, it is $69.

For Netflix, which also offers its services in several African countries, standard monthly subscription plans range from $12.99 to $15.99 per month. In Nigeria, monthly plans range from ₦2,900 to ₦4,400 and from R99 to R169 in South African Rands. Nigeria has fewer Netflix and MultiChoice subscribers than South Africa even though we are at least thrice their size in terms of population.

Due to these constraints and prevailing challenges, Multichoice and many businesses operating in Nigeria are essentially caught between the devil and the deep blue sea. They can either die a slow painful death or make tough calls to survive. Your guess is as good as mine on what any business worth its salt will do.