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Dangote Cement PLc : Driven By The Power Of Monopoly

 Despite its massive revenues allegedly driven by its near monopoly status ,   Dangcem ’s   net profit  margin remains miserable at 26% while its asset turnover and liquidity ratios are less impressive

 Both Nancy Pearcey and Andrew Jackson in their witty quotes on the power of monopoly sharply warn on its dangers .While the former dwells on the  danger of passing the control over  the general public  dearest interests  into the hands of some corporations unless the authority or the government involved  becomes  more watchful  ,check the spirit of monopoly and their thirst for exclusive privileges, the latter  ,zero in on the danger of being  a victim of mediocrity.“Competition” , Jackson noted,  “is always a good thing. It forces us to do our best. A monopoly renders people complacent and satisfied with mediocrity”.

No doubt , Pearcey and Jackson warning s above are currently playing out against Dangote Cement Plc. While the allegation of profiteering is being renewed against Aliko Dangote , its founder ,the company itself is under heated criticism for its displays of inefficiency and illiquidity in spite of its near monopoly status . Though Dangcem hit massive revenues in its 2021 results , its net profit margin remains miserable 26% while its current and asset turnover ratios are less impressive too .In a nutshell, when its massive revenue is viewed against its assets and net profit.

 For  these ,both the company and its founder  are under heated controversy again . Recently ,a  Nigerian comedian known with the stage na me: Ambassador has called out Aliko Dangote, Africa’s richest man. In a recent video making the rounds on social media, Ambassador described Dangote as a very wicked businessman who takes advantage of people everyday for his own selfish and personal gains.

According to this angry comedian, it is immoral and utterly disgusting for one single person to own and control the cement market in a country of many enterprising people like Nigeria.

“There is no Nigerian that will be given the opportunity that Dangote has that will not be the richest man in the world. Only one person is supplying cement to over 200 million Nigerians. No wonder he slept and woke up one morning to increase the price of cement from 2,500 to 5,000 naira which is over one hundred percent increase.”

He accused Dangote of impoverishing and oppressing Nigerians with his monopoly. He also described him as a ruthless businessman who does not care about the suffering of common Nigerians.

The comedian therefore called on the government of Nigeria to come clean on the cement merchant who is obviously enjoying government protection and support.

According to this concerned Nigerian, every Nigerian irrespective of class or tribe remains the ultimate victim of Dangote’s wickedness. And for him, this is the time to speak out. There could not have been a better time.

It not only ambassador that is unhappy with Aliko Dangote . Even BUA Foods Plc in a press release recently on the Suspension of the sales of sugar alluded the alleged unpatriotic attitude of Dangote PLc . “Whilst the suspension of sales of Sugar by Flour Mills may be understandable because the 2022 raw sugar allocation has been declined by the government due to compliance issues, we do not understand why Dangote has joined. In our opinion, this stoppage may be intended to create scarcity, force the prices to artificially go up, profiteer even more, and blackmail the government to review the denial of allocation to Flour Mills due to compliance issues”.

The company however , urged the government not succumb to usual antics of Dangote and others “We believe that government should not be blackmailed into rescinding a compliance-based decision and the process should be allowed to follow its due and proper course in any event, we would like to reiterate that BUA does not intend to join this suspension of sugar sales nor increase prices between now and Ramadan (a peak demand period for Sugar) as the others have done.”

It i is not only the above two that are angry ; many more are vituperating . Aliko Dangote , chairman Dangote Group , is highly controversial .To some he is a quintessential business man, a phenomenon and business luminary ;he is respected ,loved and admired for his business ingenuity ,entrepreneurship ,philanthropy and success ,not only in Nigeria but globally .To these observers , he is a blessing and a pillar to the nation’s economy. Paradoxically , however ,to others he is mere exploiter ,an anointed and institutional opportunist . The controversial perception of this global personality is usually seen in the styles ,models or operations of his business entities . One of these is Dangote Cement Plc

DANGCEM 2021 Results: Low  Asset Turnover Ratio  ,Tight  Liquidity, miserable net profit margin   

A look into the books of the company  shed more lights on those allegations  as much. , When you peep hard into the financial results of Dangote Cement Plc in 2021 , what , indeed , stares you in the face is Leviathan gross revenue at the top line; down the bottom line ,however , there is one big fact that scares you too ;this is its Lilliputian net income .But beyond its Lilliputian net income delivered against its massive revenues  which is  capable of putting off any good investor on Dangote Cement Plc scorecard   are in the details that demystify this supposed  world class entity  : its negative working capital ,tight liquidity profile ,uninspiring asset turnovers, huge or massive debt overhang and finance costs . However, only a thoroughly  inquisitive investor or a person in the field of corporate analysis would take note of these scaring pictures of this company  with near monopoly privilege

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Dangote Cement Plc ,the manufacturer of cement , a flagship product of Dangote group of companies , has continued to deliver mega bulk for the business mogul year on year ; no doubt, it depicts a picture of a formidable enterprise. On the Nigerian Stock Exchange today, it remains one of the listed companies with frightening profile with almost all the traits of a world-class corporate champion ;its market capitalization worths over one trillion Naira.

And most importantly , it is one of the only two listed companies as at today with a record of a revenue of N1trn ; its revenue which inched up Y-o-Y massively to N1.02trn from N761.44bn in 9months 2020  had its gross profit  increased to  N618.79bn in 2021 from N443.90bn in 9months 2020 . Its gross profit margin jumped to 60.5 % from 58 % year on year between 2020 and 2021 .Full year 2021, its revenue increased by 33.7% to N1.383 trillion from N1.034 trillion .These  is ,no doubt , outstanding features every good investor will be cranny for … .

However ,what  are scaring about Dangote Cement PLc are in the details ;these details culminated  in the top line that sharply contrasted with the bottom line ,a  Lilliputian net income that consequently led to its uninspiring net income margins . Though the net income increased by 32% to N364.44b from N276.07b compared to 33.7% increased in revenue to N1.383 trillion from N1.034 trillion , its net income margins fell marginally to 26% from 26.7% . This indicates the company made only N26 profit from every N100 revenue made at the top line . This is where the management is exposed to be gravely inefficient  or is a company with 26% net income a model a good investor is looking for ?

But Dangcem  Lilliputian net profit relative to its massive revenue may not spring any surprise when viewed from the strategic choices adopted by the management . Dangcem is driven largely by negative working capital and huge debts. The limestone crusher’s working capital continued in its negative trend, reflecting that the company’s current liabilities have steadily been higher than its current ratios .This situation can be a cause for concern for lenders and creditors, since the firm may not have sufficient liquid assets to pay for its short-term obligations . The negative capital continues to grow even though growth in current assets outpaced growth in current liabilities in 9months and full year 2021

Its preference for debt over equity with the danger of its rising finance costs constitutes a threat to its bottom line  . At the last nine months and ultimately at the end of 2021 , its Finance costs became a big time spoiler. While its finance income fell Y-o-Y by -24.44% to N13.85bn from N18.33bn , its finance cost skyrocketed by +41.96% to N48.69bn in 9months 2021. At the full year 2021, finance income fell again by 30% to N20.77b from N29.81b just as finance costs rose by 49% to N65.71b from N43.99b .

These strategic choices have continued to raise high level concerns . Only a company like Dangote Cement could afford these luxuries of operating a strategy of negative working and high debt profile .This is simply due to the oligopolistic structure of the industry it belongs and its near monopolistic position or advantage since the industry structure delivers low threat of entry and hence allows any player with this privilege to increase prices  by supply manipulations .However ,one thing that cannot be disputed is that the rising finance costs from its massive debts is impugning its efficiency and profitability while operating with negative capital renders its illiquid  and  only a  company like Dangote with its near monopoly privilege could survive these heats .

Naturally , for  a company to be competitive , it will either gain cost or differentiation leadership or both .Dangote Cement , however, to some of its critics , allegedly depends on the privilege of a monopolistic entity to survive ,throwing efficiency to the wind . By the above analysis, Dangote Cement Plc is not a cost leader neither does it have any significant differentiated leadership that makes its products unique  than its competitors tat warrants higher prices of its products above others ..

This is the reason why the outstanding performance in term revenue generation is linked to its near monopolistic privilege in its industry . But Dangcem could not sustain the tempo of its revenue and replicate this at the bottom line .

 Sequel to this scenario , while the whooping fortunes of this entity have continued to generate accolades and jubilations from its investors ,for most times it raises  deep concerns and questions from the general public  and financial analysts against it and its founder: “ What is driving this mouth watering fortune than its near monopolistic power” ? , some analysts would query; they believe the cement manufacturing giant relies on this power or industry structure to dictate either the output or price or both at expense of the near helpless consumers and masses who are at the receiving ends

Their grouse may not be farfetched . Wholesale cement prices have risen by an average of 15.0% since the start of 2020 as marketers transferred some raw materials cost burden to consumers ;manufacturers believe elevated demand levels aided this cost burden transfer.Market intelligence also revealed retail prices ballooned nearly by 40 percent since January ,2021 from an average of N3100 to N4000 in January ,2022 .The kernel of this argument is usually associated with oligopolistic structure of the industry it belongs which some aggrieved consumers believed this manufacturer is exploiting against their interest .There are three major companies manufacturing cement in Nigeria out of which Dangote almost occupies a monopolistic position .

Estimate by a reliable market analyst, in 2021 revealed DANGCEM expanded its domestic market share by 2.5 ppts YoY to 62.5% while BUACEMENT and WAPCO’s market share contracted by 1.0 ppt YoY and 1.5 ppts YoY to 19.2% and 18.4%, respectively.

Meanwhile the company’s strategic choices of negative working capital and high degree of debts with the attendant massive finance costs are major chinks in its armour . The former make its liquidity to be dangerously strained while the latter wrecks untold havoc on its net income .

A healthy business should have an ample capacity to pay off its current liabilities with current assets. A ratio of above 1 means a company’s assets can be converted into cash at a faster rate. The higher the ratio, the more likely a company can honor its short-term liabilities and debt commitments. .A higher ratio also means the company can easily fund its day-to-day operations. Moreover , the more working capital a company has, the less it’s likely to have to take on debt to fund the growth of its business. ….

 A good or sound  company is known by its net income margin ,liquidity and asset turnover . Although Dangote Cement made a whooping amount of revenue ,the cement manufacturer’s asset turnover ratio has not been impressive ;it has been stable at 0.44 between 9month 2017 to 9months 2020 ; for 9months 2021 it was 0.50 compared to 0.44 in the corresponding period of 2020 reflecting the steady rise in the revenue of DANGCEM . However, while this indicates an uptick in asset efficiency , it remains below an average standard . The higher the asset turnover ratio, the higher the efficiency of the assets ; a higher number indicates that it is using its assets more efficiently. For instance, an asset turnover ratio of 0.50 means it is generating 50k of sales for every Naira of an asset  . Broadly, most analysts consider a ratio of above 1.0 to be good

For Dangote Cement plc  driving revenue base appears to be easier as an industry price dictator. But one thing is to expand the revenue base another thing is to possess world-class operating skills that deliver better net income.  Though , after all deductions including paying a tax man its profit grew by 33% Year on Year to N278bn from N209 Billion, its net profit margin backtracked marginally from 27.4 % in 2020 to 26.7 % in September 2021 , indicating making less than N27 as profit from every N100 made as its turnover  despite the fact that its turnovers continue to take upward swing seismically .To some observers and analysts , what have continued to raise questions  are  whether its preference  for more  debts  than equity to finance its operations as well as negative working capital  are not tactical errors or deliberate policies. ..  Whatever  it may be, these two strategic choices are nothing but a threat to optimizing its potential profitability

Asides the above negative impacts ,Dangote cement and its competitors are alleged to be    exploiting its dominance against the general interest of the masses . This is a raging  allegation  against this business mogul  who is  Africa’s richest man. Some observers noted that Dangote is allegedly dictating the market supply to dictate the price or both at other time .This is a natural attitude of a monopolist .  More so , the rest market share is shared by the other two manufacturers , a situation that further weaken the competition .  

Ordinarily, in an oligopolistic setting ,the industry is dominated by a small number of large firms, firms that sell either identical or differentiated products, and the industry has significant barriers to entry. As indicated above, in Nigeria, there three companies in the cement industry and Dangote Cement controls greater market share near to monopoly level ; others are not large players . Sequel to those attributes , under oligopoly, with a strong management , a firm can earn super-normal profits in the long run as there are barriers to entry like patents, licenses, control over crucial raw materials, etc. These barriers prevent the entry of new firms into the industry and gives them to expand their revenue base .. Dancem is exploiting these advantages or privileges in Nigeria ;with its strategic forward and backward integrations. Dancem has been able to firmly maintain its hold in the industry and grow its revenue .

But the above initiatives are not easy , they require a lot intellectual energy and a lot of robust resources and core competencies . Still , some critics believe this industry is tilted in favour of Dangote Cement in Nigeria with massive market share relative to the rest players as indicated above to bestow on him certain critical success factors .

The question whose answer is difficult is whether in a highly competitive environment Dancem could achieve the same outstanding performance and be as much rich ?. No doubt , Dangote’s market share could give it a better advantage of economic of scale .Size comes with many advantages : First, having a capacity to match the resources and global distribution of large competitors brings advantages. Second, large companies also tend to devote a disproportionate share of their resources to training ,research and education . Third, it opens the door to many of tomorrow’s mega-opportunities will require significant resources. All these advantages are being duly exploited by Dancem relative to its competitors .These ,however , come with the challenge of its significant employees . However, overall ,its large scale or economic of scale bestows on it cost leadership and large resources at its disposal is a fulcrum that drives its product innovation and price leadership . In nutshell , these two opportunities have bestowed on it both cost and differentiation leadership unmatched by the other two competitors .

By cost leadership , a company becomes the lowest cost producer in the industry and this is achieved by producing in large scale which enables the firm to attain economies of scale. High capacity utilization, good bargaining power, high technology implementation are some of factors necessary to achieve cost leadership . Dangote Cement Plc enjoys these attributes . With differentiation strategy, it maintains unique features of its products in the market , achieve market leadership and charges a premium price for the products due to high or perceived value added features . Furthermore, superior brand and quality, major distribution channels, consistent promotional support etc. are the attributes of Dangote cement that deliver it ever growing fortunes .

Dangote Cement Plc is exploiting this strategy to drive its leadership in this industry . To maintain differentiation leadership ,investigations revealed its product dries faster than its competitors’ after use . For this singular quality advantage , a bag of cement of Dangote is more expensive yet smaller in size than others ; and it sustain it with robust competencies and resources .These are advantages bestowed on the company by its size advantage against its weaker competitors .

.Al of them enjoy these advantages at various degrees relative to their sizes . What the three cement manufacturers practice is alleged to be collusive oligopoly ,a market situation wherein the firms cooperate with each other in determining price or output or both ,with Dangote Plc as the leader in both ways .

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However, it will be highly myopic to attribute Danote Cement fortunes sigly to the market it enjoys . .While the above critical success factors (CSFs) or performance requirements are fundamental to an organization’s success , core competences, mainly based on knowledge assets and intellectual capital, that align with and underpin the key success factors of the market, give competitive advantage, better performance and better market position needed to translate them to reality .

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