SEYMOUR SLOANIDEAS THAT MATTER

OppORTuNITIES IN AfRIcA:THE RISINg AfRIcAN cuSTOMER

THE TIME TO ESTABLISH A fOOTHOLD IN AfRIcA IS NOW

Africa is witnessing a rapidly growing middle-class as well as greater riches from improving com-modity pricing in addition to the general economic advancement driving the economy to record levels of growth. This presents opportunities for growth, but requires rapid action as competition intensifies.

The natural balance of Africa’s economy, away from financial services towards the primary indus-tries and tourism, insulated the continent from the worst of the global economic crisis – offering growth in a time of recession. A number of consumer goods brands were aware of this and were early with their Africa entry strategies. This has placed some at a significant advantage, but not one that is insurmountable.

Africa is an extremely attractive continent in which to do business currently. With a total GDP of $1.5 trillion, it is comparable to Brazil, India or Russia, and this is without fully mobilising its eco-nomic factors. The potential of Africa is far greater than its current GDP.Over the last twenty five years the political risk climate has reduced significantly. While there are still some flashpoints, they are currently in the minority and as such, the investment climate looks more positive. Trading blocs such as SADC in Southern Africa are useful platform for, not only sta-bility, but successful trade and growth. These will prove to be enables of significant growth.

A growing consumer class, culturally sophisticated, well-travelled and globally aware, is growing so fast that total consumer spending is likely to more than double by 2020. Current data supports this. Euromonitor and the African Development Bank suggest that 17% of the world’s population will live in Africa by the year 2020, and the continent’s middle class will grow from one-third of the population.

In five major African economies alone (Algeria, Egypt, Morocco, Nigeria and South Africa), there will be 56 million middle-class households with disposable incomes totalling more than $680 billion over the next eight years. These figures are conservative estimates based on discussions Seymour Sloan has had with a number of stakeholders, but still present a positive picture of African growth potential.

African consumption per capita is comparable to those of India and China, but is expected to grow at a faster rate for the foreseeable future. The increased rate of urbanisation has created new sources of demand and at the same time, brought retailers and consumers closer together. It is this proximity that will be the catalyst for an increased growth rate.

For those able to cope with the differing business culture in Africa and the numerous obstacles that can sometimes slow down the rate of progress, there is significant growth potential. With many organisations seeing the same potential the competitive landscape is intensifying. Over 70% of the top 50 global consumer goods producers are currently embracing Africa’s rapidly expanding con-sumer market. For 10 of the top 50, Africa currently represents over 5% of their global sales—as much as 14% for Diageo and 10% for Parmalat— and at a superior margin that established mar-kets.

Africa is an interesting market as it is the first marketplace where developed brands are competing with emerging market brands on a relatively even competitive platform. Examples include Sin-gapore’s Olam, Saudi Arabia’s Savola Foods and India’s Marico or Godrej Consumer Products. These brands also see the value in African expansion and are pursuing it aggressively.

The main consideration is that window in which to make a meaningful impression in Africa is closing as competition increases in volume and intensity. The time to act is now to maximise the opportunities available.

For brands that wish to grow, ignoring Africa is no longer an option, particularly looking into the long term. For those currently operating in Africa now is the time to push for faster growth by expanding their African footprint. Whether your organisation is testing the waters or debating over wading in, it is sensible to understand the factors that make Africa a unique place to operate and invest in.

Identifying Investment Targets

The most significant decisions you will face are; the ideal entry location as well as the ideal ex-pansion options. The traditional emerging markets model involved carefully planning expansion by first entering the biggest markets, then moving to the primary regions or cities, where dense pop-ulations reduce the gap and cost between retailer and customer, and finally opting to operate in smaller regions. Africa is different, its unpredictable nature means that adopting such a logical and focused approach may prove harder than other options..

There are a number of options an organisation could adopt. They could start with the 10 markets that, according to Euromonitor, deliver 75% of Africa’s GDP (South Africa, Egypt, Nigeria, Algeria, Morocco, Angola, Libya, Sudan, Tunisia and Kenya). Following that comes the decision of which of the tier-2 nations present the most attractive options. An alternative is to operate based on the nations with the longest record of stability. Favouring stability over output might provide slower short-term reward, but history shows that stability is a greater factor in economic growth and investment than anything else.

Any subsequent expansion would be shaped by emerging trends observed having entered Africa and built an understanding of the continent.

The key ingredient for success in Africa is being both flexible and quick enough to exploit opportu-nities are they arise. As the political, economic and regulatory climates can change at frightening speed, you must be ready to act as soon as an opportunity looks favourable.This is also true for acquisitions. It is prudent to act quickly when an opportunity to acquire scale presents. Heineken placed Ethiopia on its top list of Africa markets to target, but it was not the leading option on that list. Irrespective, they acquired two breweries in Ethiopia the moment they became available.

They still had work to do to develop their Nigerian interests (their priority at the time), but were aware and had established the criteria that would prompt them to act in other markets. When these were triggered in Ethiopia, they acted with speed and focus. They are good assets to hold while they build their African presence and means they will not pay inflated prices further down the line.

Partnerships as an Entry Route

Africa is not the continent where it is easy to go it alone. You have to truly consider how you will enter the market and in addition, how you will acquire the knowledge and understanding to then expand and grow in Africa. Few, if any, consumer packaged goods companies have succeeded on their own. The commercial reality is that, either a partnership of some description or an acquisi-tion, are essential in establishing a foothold in Africa. Successful companies seek different types of acquisition or partnership opportunities: these could be brands with strong competitive positions, high brand equity, or organisations with sophisticated supply chains and access to key resources. It is also worth considering the importance of acquiring the right skills to operate successfully in Africa.

While it is likely that suitable targets will not only be, few and far between, but they will also be smaller in size that they may be elsewhere. None of these should scare brands from doing busi-ness in Africa. In most markets the opportunity to scale-up is there, it just requires commitment. To minimise risk, many players start by establishing joint ventures, holding a majority position, with an exit clause in case of venture failure. This provides the opportunity to see if a full acquisition is sensible and favourable. When considering M&A activity there is value in accepting that there will be some opacity in the available information on target companies. This will mean that the due dil-igence undertaken is at a much lower level, effectively having to be on the ground and using local contacts to get a qualitative assessment of the prospect.

Knowing What to Sell

Careful thought and consideration is required around the product portfolio that you will sell. The two main approaches are, existing products v new products. Selling your existing products should be possible in Africa, if the demand is sufficient. Careful research is required to ensure that there is both the demand and competitive latitude to compete effectively.

Where your current product line is currently underpenetrated, you should not hesitate: There’s room for growth. In Africa, creating new consumption habits can happen quickly—possibly even faster than gaining competitive momentum in more established segment. One way brands can successfully launch consumption of under-penetrated categories is by investing in consumer edu-cation. As an example, Unilever grew the market for its toothbrushes and toothpaste in Nigeria through an education programme to increase brushing from once a day to twice a day. The campaign helped the company build robust toothpaste volume growth over the past decade.

Africa may appear to be a daunting place to do business. However, what is required is a loosening of mindset and an acceptance that people are already operating in Africa at a profit, so it is possi-ble. There is no single solution that will work for everyone and part of the experience of working in Africa will be the learning process and overcoming obstacles.

Our research and experience tell us that Africa is no more challenging to do business in than any other market. It may simply suffer from issues around perception. At Seymour Sloan, we feel that there is not another market that promises the significant growth that Africa can offer. Our view is that those that embrace Africa and accept it for what it is will find ways to operate successfully.

SEYMOuR SLOAN

Seymour Sloan deliver great ideas that drive progress. We help companies do things differently, delivering market changing solutions.

We use the brightest and bravest minds to challenge convention and successfully deliver innovative solutions. We believe in short-term engagement and long-term support. This is cost-effective for our clients and serves as a basis for their continued growth.

© SEYMOUR SLOAN 2014

IDEAS THAT MATTER

SEYMOUR SLOAN