The final submission for the Unlocking Investment and Finance in Emerging Markets & Developing Countries Course: Topic 1 Direct Investor

1. INVESTMENT
STRATEGY
Direct Investment from Japan into the South African Confectionary
Industry
明治製菓株式会社
For Meiji Seika Kaisha, Ltd.
Opportunities
Obstacles
Impact Investing & ESG Investing Principles

2. Profile: Meiji Seika
Kaisha, Ltd.
明治製菓株式会社
DairyConfectionaryChocolate
Protein
Powder
Focusing on the food segment, Meiji Co. Ltd
produces products across the dairy, confectionary,
nutrition and pharmaceutical sectors.
In 2018, Meiji Co. Ltd boasted net sales of ¥1,240.8
Billion and a ROE of 13.1%.

3. Problem
Meiji is based in Japan with operations across the world, but thus
far there are none on the African continent.
• Africa has the world’s youngest population, representing large
future consumer markets.
• It currently boasts the highest population growth rates with a
collective population of 1 Billion.
• African Continental Free Trade Area entered into force on 30
May 2019 for 24 countries that ratified the agreement.
• Markets are underdeveloped, risks are high, however the reward
is guaranteed in the long-run for companies who might be willing
to invest to capture market share
AfCFTA Countries

4. Problem
Meiji is based in Japan with operations across the world, but thus
far there are none on the African continent.
From the Meiji
Annual Report
2018

5. South Africa Provides the Perfect Entry into the
African Market…
Rank 82nd Ease of Doing Business
Ranking 2019*
*World Bank Group Doing Business Report 2019
BRICS country`
Highly developed Dairy
Industry
Highly developed Sugar
Industry
Close Proximity to
Cocoa Producers
Close Proximity to
Growing Markets
Strong Regulatory Environment &
Rule of Law
South Africa
Opportunities Industry Opportunities
Rising middle class & large domestic
market
Mature manufacturing sector**
Strong target local value chain
Advanced Financial Service &
Banking Sector
**IMF 2016 “SA is the Most Diversified Economy in Africa, Regional Manufacturing Hub & Export Gateway to Africa

6. Context: Trends
Social Trends
• Increased
consumption &
interest in
chocolate &
confectionary,
concerned with
sustainably
sourced cocoa
Economic Trends
• No 1 Diversified
Economy in Africa
(IMF2016)
• Regional Market
of 26 countries
• World 3rd
Cheapest Dairy
Producer
• World 2nd
Cheapest Sugar
Producer
• Increasing
unemployment
• Increasing Poverty
Technological
Trends
• No 3. globally
for fintech
• Most
Industrialised
Country in Africa
• Regional
Manufacturing
• Brain drain
Environmental
Trends
• Increased
awareness and
focus on
sustainability
and eco-
friendliness in
South Africa,
conscientious of
sustainably
sourced cocoa
Political &
Regulatory Trend
• Strong,
established
democracy
• Strong Rule of
Law
• Strong Media
Openness
• Recent trend
towards
nationalisation
and
expropriation of
land without
compensation

7. What Opportunities to Invest In?
Greenfield Brownfield
The confectionary industry in
SA is growing at a compound
annual growth rate (CAGR) of
2.4%, giving an industry
value of between R12.4bn
and R13.5bn.
1
https://www.whoownswhom.co.za/store/info/3296?segment=The+Confectionery+Industry)
The market share of the
largest three chocolate
companies is being eroded
by imported brands and
from the growing number of
niche, artisanal chocolatiers
who have entered the
industry.
3
Growth of up to 15% has
been forecast for the
premium confectionery
segment which is currently
dominated by imported
brands Lindt and Ferrero
Rocher.
4
Stakeholders believe there
are also opportunities in the
lower end of the market
where smaller more
affordable package sizes are
being sold, often by hawkers
and other informal traders.
2

8. Brownfield vs Greenfield
• The ability to gain access to a new foreign market swiftly
• Lower fixed costs due to already established facilities,
infrastructure, and network
• Lower staffing and training costs due to already employed
workers at the facility
• May include existing approvals and licenses from the
government or regulators
• Depending if the facility is made to fit, whether
modifications exist, or if the facility can be utilized without
major alterations and upgrades, a brownfield investment
can be a cost-effective option
• The facility or infrastructure may require major upgrades,
which would increase the
• foreign investment cost
• The facility may be old and may require high maintenance
and upkeep cost
• There may be operational inefficiencies if the facility cannot
adapt to new production
• needs
• There may be scalability and expansion issues by using
already constructed facilities
• Locational constraints
• There may be unforeseen tax and regulatory issues
Advantages Disadvantages
Brownfield

9. Brownfield vs Greenfield
• High level of control over business operations
• High quality control over the manufacturing and sale of
products and/or services
• High control over brand image and staffing
• Economies of scale and economies of scope can be achieved
in terms of marketing,
• research and development, and production
• Bypassing trade restrictions
• Creating jobs for the economy where the greenfield
investment is taking place
• An extremely high-risk investment – a greenfield investment
is the riskiest form of
• foreign direct investments
• Potentially high market entry cost (barriers to entry)
• Government regulations that may prevent foreign direct
investments
• High fixed costs involved in establishing a greenfield location
Advantages Disadvantages
Greenfield

10. In the event that South Africa’s
political climate heats up to the
point where expropriation
without compensation becomes
a reality, Multilateral
Investment Guarantee Agency
(MIGA)’s Political Risk Insurance
may be a good option upfront.
To mitigate against the risk of
currency fluctuation, the WBG’s
IFC allows for protection against
high volatility of earnings due to
currency movements.
This allows for a more stable
investment climate with lower
risk.
Obstacles & Risks
Medium to High Political Risk:
High corruption:
Highly Volatile Currency
Existing Market Dominance of 3
local confectionary companies
Rise of nationalisation & expropriation
without compensation political dialog
Corrupt government
The South African Rand is highly volatile
The South African confectionary industry is
dominated by three multinational
companies, Mondelez South Africa, Tiger
Brands and Nestlé,
Risk MitigationRisk Description

11. Impact Investing/ESG Principles
Promote sustained, inclusive and
sustainable economic growth, full
and productive employment and
decent work for all
Build resilient infrastructure,
promote inclusive and sustainable
industrialization and foster
innovation
In line with the Operating Principles for Impact
Management, there is a significant potential for a
sustained impact.
Investment into South Africa’s confectionary
industry could stimulate the economy to create new
jobs in a country with the world’s highest
unemployment
The introduction of a new player into South Africa’s
heavily concentrated confectionary market may
promote inclusive and sustainable industrialisation
and foster innovation.
The confectionary industry has always been a
creator of good manufacturing jobs with numerous
linkages to the agriculture, agroprocessing and retail
sectors.

12. Recommendations (Summary)
• South Africa will provide a strong launchpad for sales of Meiji products into South Africa
and Africa
• A Brownfield Investment is recommended due to South Africa’s mature confectionary
sector with many fast-growing small confectionary companies
• South Africa’s confectionary industry is growing and high profit
• South Africa already has a highly developed manufacturing sector which is a concern for
the high quality production of a company like Meiji
• In terms of risks such as political risk or volatile currency risk identified, MIGA and IFC
products like Political Risk Guarantee and Currency Hedging mitigate against these risks
• From an impact perspective, Meiji can assist in driving progress towards SDG 8 and 9 by
creating goods jobs in South Africa through investment and improving its manufacturing
sector
Should Meiji Invest in South Africa? Yes