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Rise of the African Opportunity


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Analysis of the opportunities and challenges of working in Africa, particularly for consumer facing companies. Includes strategies used by firms to overcome challenges

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Rise of the African Opportunity

  1. 1. 2015 A perspective from Boston Analytics Rise of the African Opportunity
  2. 2. Content 1 Introduction to Africa Today Regional Assessment of Africa Challenges of Accessing Consumers in African Markets Strategies to Overcome Challenges Appendix Changing Consumer Market Concluding Thoughts
  3. 3. Content 2 Introduction to Africa Today Regional Assessment of Africa Challenges of Accessing Consumers in African Markets Strategies to Overcome Challenges Introduction to Boston Analytics Appendix Changing Consumer Market Concluding Thoughts
  4. 4. Economic interest in Africa stretches back over 100 years Africa in 1914 Key Points 3  In the nineteenth century, Europe’s major powers battled it out for economic dominance of Africa  In 1880, Europeans controlled ~10% of the African territory. By1913, Europeans ruled more than 90% of the African continent – In 33 years, European nations had added almost 10 million square miles - one-fifth of the land mass of the globe - to their overseas colonial possessions via Africa  The wave of Independence across Africa in 1950s and 1960s brought an end to the colonial rule by Britain, France, Belgium, Spain, Portugal and Germany “On 7th January 1876, King Leopold II of Belgium read in The Times report of a Lieutenant Cameron, who had just finished an arduous three-year journey across Africa which was widely assumed to be barren and inhospitable, but Cameron described a ‘magnificent and healthy country of unspeakable richness ripe for some enterprising capitalist that might take the matter in hand” (1) Sources: (1) The Scramble for Africa by Thomas Pakenham, Avon Books, 1992 (2)
  5. 5. In more recent decades, its reputation has ranged from hopeless to hopeful 4 Sources: (1) Time (2) Economist Perspectives on Africa and its prospects have changed dramatically in the past decade from a continent with no hope to one which is rapidly emerging on the international stage 1984 2000 20111992 2012
  6. 6. Note: (A) Despite the fact that the African continent has over 1 Billion people, only seven countries in Africa have a population larger than California, i.e., Nigeria, Ethiopia, Egypt, the DRC, South Africa, Tanzania and Kenya Source: (1) IMF World Economic Outlook Database As a point of comparison, today Africa has roughly the same population as India, but an economy the size of Brazil spread over a much larger land mass and set of nations 5 Region Africa Brazil China India Russia Population 2013 (M) Population Density (people per sq km of land area) GDP 2013 ($ B) GDP per capita 2013 ($) Area (M Sq. Km) Compared to the BRIC countries, Africa as a continent is large, less densely populated and generally poor 1,960 10,958 6,569 1,414 14,973 1,361 1,243 2,064 2,190 8,939 1,758 2,118 1,053 141200 29.4 8.5 9.3 3.0 16.4 35 23.7 145.5 421.1 8.8
  7. 7. Its economy now appears to be on a growth path however, with real GDP growth, improved infrastructure and improved health status 6 Parameter 1980‒1990 1990‒2000 2000‒2010 Economic Growth Real GDP Growth 1.9% 2.5% 5.1% Economic Diversification(A) 66% 66% 61% Per Capita real GDP Growth -0.8% 0.0% 2.7% Poverty Ratio(A) 76% 76% 70% Unemployment Rate (Highest) 16.3% 15.6% 15.3% FDI Inflows Growth 21.7% 13.0% 16.3% Exports Growth -1.4% 3.5% 13.2% Communications Infrastructure Mobile Subscribers (per 100 People)(B) 0.002 1.721 44.713 Health Status Prevalence of HIV(B),(C) 2.21% 5.76% 4.84% Infant Mortality(B),(D) 106.31 94.07 68.12 Life Expectancy (Years)(B) 50 50 55 Notes: (A) Includes Kenya, Nigeria and South Africa (B) For Latest Year (C) % of Population between 15-49 years age (D) Per 1,000 live births Sources: (1) African Democracy, A glass half-full, Economist, Mar 31st 2012 (2) Freedom in the World, Country Status by Year, Freedom House (3) Lions go global: Deepening Africa’s ties to the United States, McKinsey Global Institute, August 2014 8 of the world’s 15 fastest growing countries 2000-2013 were in Africa(3)
  8. 8. In addition, democracy is gaining a greater foothold in the region Africa Democracy Ratings (2011)(1) Freedom Development in Africa(A),(2) 7 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1975 1980 1985 1990 1995 2000 2005 2010 2014 Free Partly Free Not Free Note: (A) Freedom in the World, Freedom House’s flagship publication, is the standard-setting comparative assessment of global political rights and civil liberties Sources: (1) African Democracy, A glass half-full, Economist, Mar 31st 2012 (2) Freedom in the World, Country Status by Year, Freedom House
  9. 9. In terms of international partners, while the US contributes the greatest in terms of humanitarian or development assistance to Africa, China leads the way in terms of trade…by a long shot 8 Source: (1) August 5, 2014 As current trade figures reflect, other emerging markets such as China, India and Brazil have become significant trading partners and represent formidable competitors in many product categories. Indeed talk of a South-South connection is emerging 0 2 4 6 8 10 Norway Netherlands Sweden China Canada Japan Germany Britain France United States Official Development Assistance (2012, $Bn) Trade with sub-Saharan Africa (2013, $Bn) 0 20 40 60 Brazil Spain Britain Japan Netherlands France Germany India United States China 160
  10. 10. Content 9 Introduction to Africa Today Regional Assessment of Africa Challenges of Accessing Consumers in African Markets Strategies to Overcome Challenges Introduction to Boston Analytics Appendix Changing Consumer Market Introduction to Boston Analytics Appendix Concluding Thoughts
  11. 11. Africa is best thought of in terms of its parts however, rather than as a single entity. Conventionally, Africa is divided into five regions with North and Southern Africa being the most investment friendly to-date 10  A mineral-rich region, with Bauxite, Uranium, and Iron ore reserves  Dominates world cocoa production (~65% share)  Key Challenges: Underdeveloped infrastructure and difficult business environment  Key Country: Nigeria  Preferred investment destination in Africa  Have strong ties with the European market, esp. France  Benefits from historical ties to Arab world  Key Challenges: Recent political upheavals  Key Countries : Egypt, Libya  Agrarian economy, dominated by tea and coffee production  Key Challenges: Civil unrest & political instability, and underdeveloped infrastructure  Key Country: Kenya  Heavy dependence on oil  Least integrated region due to wars and poor governance  Key Challenges: Weak infrastructure, in terms of transportation, electricity, and water  Key Country : DRC  Most preferred investment destination in Africa  Ranks highest on ‘ease of doing business’ in Africa  Highly developed transportation and communication system. Highest literacy rate. Relatively greater intra-regional trade  Key Country : South Africa North East West Southern Central WestNorthEastCentralSouthern Source: (1) Lions of Africa, McKinsey Global Institute
  12. 12. Region North East West Southern Central Total No. of Countries 53 Area (M Sq. Km) 29.4 Population 2010 (M) 1,014 Density of Population (Person/sq Km) (2010) 35(B) GDP 2010 ($ B) 1,705 GDP per capita 2010 ($) 1,681(B) Major Markets Algeria, Egypt, Libya, Morocco, Tunisia Kenya, Ethiopia Ghana, Nigeria Angola, South Africa Equatorial Guinea, Gabon Key MNCs(A) P&G, Unilever, Kraft- Cadbury, Nestle, Coca Cola, PepsiCo Unilever, Nestle, Coca Cola, PZ Cussons Coca Cola, Kraft- Cadbury, Nestle, PZ Cussons, PepsiCo, Unilever Coca Cola. Danone, Kraft- Cadbury, Nestle, PepsiCo, Unilever, Mars- Wrigley Coca Cola, Nestle 583 200 319 517 86 North and Southern Africa are also the regions with the greatest wealth; That being said, there is a great deal of growing interest in East and West Africa where firms hope to enter and enjoy a first mover advantage 11 Notes: (A) Within the CPG industry (B) Average across countries Sources: (1) Lions of Africa, McKinsey Global Institute (2) World Bank Database 46 5028 163 297 302 140 113 5.7 6.4 6.1 5.9 5.3 5 14 16 10 8 24 21 North East West Southern Central 3,579 7643,6991,057671
  13. 13. Indeed, some describe a “cross” overlaying the continent and suggest countries at the endpoints represent some of the most attractive opportunities for multi-national consumer (A) 12 North East West Southern Central Kenya Ethiopia Egypt Ghana Nigeria South Africa Note: (A) Excluding Angola which is very often also listed in the top countries of interest to consumer products manufacturers Source: (1) Primary Research
  14. 14. Content 13 Introduction to Africa Today Regional Assessment of Africa Challenges of Accessing Consumers in African Markets Strategies to Overcome Challenges Introduction to Boston Analytics Appendix Changing Consumer Market Introduction to Boston Analytics Appendix Concluding Thoughts
  15. 15. In terms of consumer spending, while small, Africa has grown faster than most other regions; of the money spent, over 50% is spent on food, beverages and other consumer goods Growth in Global Consumer Spending Consumer Spending Split in Africa (2012) 14 10,294 15,827 8,403 11,5455,318 10,801 526 1,202 830 2,006 - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 2004 2012 $Billion America Europe Asia Africa Others 43% 17% 11% 6% 5% 3% 3% 12% Food & Beverage Housing Non-food Consumer Goods Healthcare Telecom Banking Education Others Source: (1) World Bank Database CAGR 5.5% 4.0% 9.3% 10.9% 11.7%
  16. 16. The African consumer market is partly driven by growth in the continent’s population which is expected to double by 2050 15 Sources: (1) (2) view/news/one_third_of_young_people_in_sub_saharan_africa_fail_to_complete_primary_school_and_lack_skills_for_work/#.UpcGOPu3Wj8 (3) 1.1 0.6 4.3 0.4 0.7 2.4 0.8 5.3 0.4 0.7 0.0 1.0 2.0 3.0 4.0 5.0 6.0 All Africa Latin America/ Carribean Asia North America Europe Population(billions) Population (billions) 2013 2050E  The consumer market in Africa is expected to double in the next 40 years – By 2050, ~20% of the world’s population would live in Africa  More than two third’s of Africa’s population is below 25 years of age which is growing even faster, at 2.7% – This indicates a large working age population in Africa which will further drive the future economic growth of the continent Growth in the African Consumer Population 2.1% 0.8% 0.6% 0% 0%
  17. 17. In addition, increasing urbanization in Africa is expected to boost the consumer market by increasing demand, enabling access and attracting additional investments 16 Sources: (1) Winning in Africa, Mckinsey and Company (2) Lions on the move: The progress and potential of African economies, Mckinsey Global Institute (3) The 2014 African Retail Development Index: Seizing Africa’s Retail Opportunities, AT Kearney  Percentage of African population living in cities has increased from 28% in 1980 to 40% in 2010  The rate of urbanization is similar to China and more than India; reportedly the fastest in the world at 3.6%  ~50% of African population are estimated to live in cities by 2050  Africa has ~52 cities with more than ~1M population, more than India and North America  Urbanization will boost demand and attract more investments 30% 40% 45% 73% 79% 82% 70% 60% 55% 27% 21% 18% 0% 20% 40% 60% 80% 100% India Africa China Europe Latin America North America Urbanization (2010) Urban Rural 48 52 109 52 63 48 Cities with > 1M people Urbanization of Africa The increase in urbanization will enable greater and more cost effective access to consumers
  18. 18. Sub-Saharan Africa has several countries with higher per capita spend than that of China and India Private Consumption per Capita, 2012 ($) (A), (B) 17 471 495 533 556 577 597 612 670 738 1,005 1,195 1,222 2,016 2,370 2,906 3,744 3,800 3,887 4,451 - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 Kenya Congo, Rep. Mauritania Nigeria Comoros Senegal Zimbabwe India Cameroon Lesotho Angola China Swaziland Gabon Namibia Equatorial Guinea Botswana SouthAfrica Mauritius Seychelles US$ Note: (A) Includes Sub – Saharan African countries, with the highest private consumption per capita (B) Values at constant 2005 exchange rate Source: (1) World Bank Database  Private consumption in Sub-Saharan Africa ranges from as low as $124 in Burundi to more than $12,000 in Seychelles  It is higher in many countries, largely because of uneven concentration of wealth within a small percentage of population. – For example, in Equatorial Guinea, wealth is highly concentrated and 70% of the population still lives under the UN Poverty Threshold 12,466 African Countries
  19. 19. A rise in the middle class population in Africa has led to an increase in disposable income and a subsequent growth in discretionary spending 18 Source: (1)  The percentage of the population that is middle class in Africa has increased from 28% (~110M) to 35% (~300M) in the last thirty years – Middle class population as a percentage of total population is estimated to reach ~40% by 2050  Rise in middle class population has led to increase in disposable income and purchasing power of Africans 67% 65% 62% 60% 28% 30% 32% 35% 5% 5% 6% 5% 0% 20% 40% 60% 80% 100% 1980 1990 2000 2010 % African Population Split by Income Levels Poor (< $2 per day) Middle Class ($2-20 per day) Rich (> $20 per day) Growing Middle Class Population
  20. 20. 40% of CPG spend in Africa is controlled by the tier 1 consumers, including Progressive Affluents and Trendy Aspirants African Consumers: Nielsen Segmentation 19 Type of Consumers Sub- Classification Monthly CPG Spending ($) Average Monthly Income ($) % of Total CPG Spend Key Characteristics Tier 1 Progressive Affluents ~190 ~1000 40% – Older with families – Well established Trendy Aspirants ~175 ~850 – Young and upcoming – Well educated Tier 2 Balanced Seniors ~125 ~625 28% – Better educated, tend to be in mid- thirties, married Struggling Traditionals ~125 ~375 – Under educated/ low income Tier 3 Wannabe Bachelors ~90 ~400 32% – Labourers/ entry level employees Evolving Juniors ~80 ~580 – Students/ unskilled labourers Female Conservatives ~70 ~350 – Housewives/students/ labourers Source: (1) The Diverse People of Africa, 2012, Nielsen. The data is from countries including Nigeria, Kenya, DRC, Zambia, Uganda, Tanzania, Ethiopia, Mozambique, Angola, Namibia, Zimbabwe and Ghana Key Points  Tier 1 consumers are wealthier, more urban and relatively well-educated consumers with high income and CPG spend – They drive growth of modern trade and online retail channels, and are also more open to new and expensive brands  Tier 2 consumers are Africa's middle aged and middle income populations, with average CPG category spend – They primarily focus on the needs of their families and focus on affordability  Tier 3 consumers, the largest segment within Africa, consists of consumers who spend much less on CPG categories than the average
  21. 21. Within Sub-Saharan Africa, the top global 50 CPG firms have focused their investments primarily in five countries, with over 50% operating in South Africa and Nigeria 20 Note: (A) Presence based on review of office or manufacturing locations or evidence of significant distribution/share in country Sources: (1) OC&C Global 50, 2013 (2) Annual Reports (3) BA Analysis Global 50 CPG firms’ presence in Sub-Saharan African Countries 2012(A) 21 15 11 8 8 21 17 14 11 7 7 3 15 12 0 5 10 15 20 25 30 35 40 South Africa Nigeria Kenya Ghana Angola Sub-Saharan Africa Sub-Saharan Africa Excluding SA and Nigeria NumberofGlobal50CPGFirms 35 or 70% 26 or 52% 18 15 11 36 29 Mix of US/Non-US firms in sub-Saharan Africa is similar to overall Global 50 US Firms Europe/Other Firms
  22. 22. There is evidence that global 50 CPG firms present in Africa are reaping the benefits - in the form of higher growth rates and strong returns 21 Notes: (A) Presence based on review of office or manufacturing locations or evidence of significant distribution/share in country (B) Includes all firms listed as present in Nigeria, Kenya, Ghana or Angola, and selected reviewed other Sub-Saharan African countries Sources: (1) OC&C Global 50, 2013 (2) Annual Reports Growth and Return in Nigeria Selected CPG Firms Sales 2011 CAGR of Sales 2010-11 Operating Margins 2011 ROCE 2011 (Pre-Tax)1 Global Nigeria Global Nigeria Global Nigeria Global Nigeria $13.4b $670m 13% 14% 4% 12% 11% 92% $94.8b $630m 6% 20% 14% 22% 16% 41% $64.8b $350m 10% 15% 14% 15% 22% 85%
  23. 23. Content 22 Introduction to Africa Today Regional Assessment of Africa Challenges of Accessing Consumers in African Markets Strategies to Overcome Challenges Changing Consumer Market Introduction to Boston Analytics Appendix Concluding Thoughts
  24. 24. The African opportunity is poised with multiple challenges however Challenges of Accessing Consumers in Africa Market 23  Environment Challenges – Differences across countries on multiple parameters – Lack of infrastructure – Low level of intra-region trade – Bureaucracy and corruption – Uncertain policy environment Source” (1) BA Analysis Environment Business Market  Business Related Challenges – Lack of managerial talent – Lack of strong manufacturing and distribution local partners/acquisition targets – Lack of local information – Proliferation of counterfeit goods  Market Related Challenges – Significant share of population in low income group – low purchasing power – Strong dominance of traditional trade – Underdeveloped capital markets
  25. 25. It is hard to generalize in Africa; the countries are very diverse, as they are in other emerging regions of the world Index of Intra-Region Variances among Nations on Key Economic Parameters 24 0.0 1.0 2.0 3.0 4.0 5.0 6.0 GDP Growth Rate Economic Diversification Above BoP Population % Urbanization % Consumer Spending Working Age Population % Literacy Rate Unemployment Rate Africa Americas Asia Middle East Europe Oceania World Average  African nations show smaller variations across nations on key economic parameters compared to Asia, Middle East and Overall World  However, variations on most metrics are higher compared to advanced regions such as Americas and Europe highlighting the diversity within Africa and need for a country specific strategy and not a single strategy for the continent Challenge: Differences across Countries Sources: (1) IMF World Economic Outlook Database (2) World Bank Database (3) BA Analysis E B M
  26. 26. Indeed, each country within Africa presents a unique story in terms of its business, economic and demographic features 25 African Market GDPGrowth AboveBoP Population(%) Per-capita ConsumerSpend WorkingAge Population(%) LiteracyRate Unemployment Rate(%) Urbanization Economic Diversification EaseofDoing Business Algeria B C D D D A D D D Angola D A C B B C C A C Benin C D D D C A C C C Botswana B D D D C A D B B Burkina Faso D B D A C C D A A Burundi C D C D C B D D D Cameroon A D D D D B D A A Cape Verde C C C C C A B B C Central African Republic B D D D D A D D D Chad D B A B A C A B D Comoros D C C C C D C C D Congo C B B B C B A C C Côte d'Ivoire D A A A C D A C C Democratic Republic of the CongoA C C B B C C C B Djibouti B D C B C D C C B Egypt D B A A C C A C C Equatorial Guinea D A B A B A B C D Eritrea A D D C D A D A B Ethiopia C A A A B C B A A Gabon D D D C D B C A B Gambia B C D D D A D C D Ghana B C C B A A C D A Guinea D A B A B C B B C Guinea-Bissau C B C B A C D A A Kenya D A B A A B A A A Lesotho C C D C D A B D D African Market GDPGrowth AboveBoP Population(%) Per-capita ConsumerSpend WorkingAge Population(%) LiteracyRate Unemployment Rate(%) Urbanization Economic Diversification EaseofDoing Business Liberia D B A A A D A B B Libya B D D D D B C D D Madagascar A D C B A D A D A Malawi C B A A A B B A B Mali A A A B B D B C C Mauritania A D B C D C B C B Mauritius B B B C A D C B A Morocco D A B B B D A B D Mozambique C B A A A C A B A Namibia A B B D A D B B A Niger D A A B A D C A C Nigeria A C B C B B B A B Rwanda C C C C B A C B B Senegal A C D C D A A D D Seychelles C A A A B B A C B Sierra Leone A D A D C B A D A South Africa B A A D D B A B C South Sudan B B C B C A B D C Sudan A A A B B C B A A Swaziland B A B A A D C A C Tanzania C C D D D B D D D Togo B C B C A D D D B Tunisia A D A D D D D D D Uganda B C B A B B D C C Zambia A B A C B C C B A Zimbabwe A B C A C C B B B d Countries in Highest Quartile c Countries in Second Highest Quartile b Countries in Third Highest Quartile a Countries in Bottom Quartile Notes: (A) Economic Diversification is share of Manufacturing and Services in Total GDP Sources: (1) IMF, World Bank (2) BA Analysis Challenge: Differences across Countries E B M
  27. 27. With respect to consumer spending, of the 53 countries in Africa, four represent more than 50% of the total consumer spending Share of Countries in Africa Consumer Spending (2012) 26 19% 18% 10% 6%5% 5% 3% 3% 3% 3% 26% South Africa Egypt Nigeria Algeria Morocco Angola Sudan Tunisia Ethiopia Kenya Other 45 Countries  South Africa in the South, Egypt in North and Nigeria in West are the top three countries in terms of consumer spending  Kenya – which only contributes 3% to Africa’s consumer spending is the largest market by consumer spending in Eastern Africa  The smaller 45 countries only contribute about $300 B out of a total of $1,200 B of consumer spending across Africa Sources: (1) BA Analysis (2) World Bank Database Total = $1.2 T Challenge: Differences across Countries E B M > 50% of consumer spending
  28. 28. 38 93 75 121 73 101 104 100 78 91 92 109 109 98 100 94 105 198 35 46 28 46 42 179 110 151 107 101 113 98 95 86 80 176 61 90 90 109 100 97 78 84 138 113 138 112 116 30 - 50 100 150 200 250 CentralAfricanRepublic Gabon Ethiopia Kenya Rwanda Tanzania Uganda Algeria Egypt Libya Morocco Angola Mozambique Namibia SouthAfrica Zambia Zimbabwe Cameroon CapeVerde Côted’Ivoire Gambia Ghana Niger Nigeria PriceIndex(SouthAfrica=100) Chocolate Index Sugar Conf Index Furthermore, there are often wide disparities in prices across African regions with highest variations in Western African countries Variation of Retail Price Per Kg for Chocolate and Sugar Confectionery in Different African Countries 27  Prices for same products vary between different African nations highlighting the need for in-depth country specific intelligence and potentially individual strategies  The least amount of variations were noticed between Southern African nations which reflects the fact that South Africa acts more like a region and trade flows more freely Source: (1) Eurromonitor Challenge: Differences across Countries East Africa North Africa Southern Africa West AfricaCentral Africa E B M
  29. 29. The prices can also vary dramatically across players highlighting different marketing strategies of CPG companies across countries Variation of Price Per Kg for Snickers and Dairy Milk in Different African Countries 28  The above chart compares the prices for Snickers (Mars) and Dairy Milk (Mondelēz) chocolates in the select countries  While Mars and Mondelez price similarly in some markets (e.g., Egypt and South Africa), they are very different in others 95 115 100 144 191 100 70 100 84 142 - 50 100 150 200 250 Egypt Nigeria South Africa Kenya Cameroon PriceIndex(SouthAfrica=100) Mars Snickers Mondelez Dairy Milk Note: (A) The above example of prices for chocolate brands has been used as an example to highlight price differences across African countries for same products Sources: (1) Data for Kenya, South Africa, Cameroon and US has been derived from store visits (2) Data for Nigeria and Egypt has been obtained form Euromonitor (3) Data for Philippines has been obtained from Nielsen (4) Data for India has been obtained from (accessed on 5 August 2013) (5) Data for Mondelēz price in Cameroon is for Dairy Milk Fruit and Nut Challenge: Differences across Countries E B M
  30. 30. With the exception of a few countries, road network is poor in most African nations Road Density (Km of Road/100 Sq. Km Land Area) Paved Road (% of Total Road)) 29 - 25 50 75 100 125 150 175 Ghana South Africa Kenya Côte d’Ivoire Zimbabwe Nigeria Togo Benin Egypt Morocco Zambia Tunisia Cameroon Tanzania Senegal DRC Namibia Congo Algeria Libya Botswana Angola Ethiopia Mozambique Gabon Eritrea Sudan 0% 20% 40% 60% 80% 100% Egypt Algeria Tunisia Morocco Libya Sudan Senegal Botswana Zambia Eritrea Togo Mozambique Zimbabwe South Africa Nigeria Tanzania Namibia Ethiopia Ghana Gabon Cameroon Angola Benin Côte d’Ivoire Congo Kenya DRC Notes: (A) Top 27 countries only included Source: (1) World Bank Database Challenge: Lack of Infrastructure UKBrazil IndiaChina Brazil India China UK E B M
  31. 31. Almost all African countries with the exception of South Africa rank low on global logistics Index 30 Challenge: Lack of Infrastructure LPI Rank Select Countries LPI Cumulative Score Customs Infrastructure International Shipments Logistics Competence Tracking & Tracing Timeliness 1 Germany 4 UK 28 China 34 South Africa 54 India 62 Egypt 65 Brazil 74 Kenya 75 Nigeria 90 Russia 100 Ghana 104 Ethiopia 142 Cameroon International Logistics Performance Index (LPI) 2014(A),(1) Notes: (A) Scores range from 1-5 with 5 being the highest score; (B) Top most ranked countries in Africa included Source: (1) Logistics Performance Index: 2014, World Bank African Countries 4.12 4.01 3.53 3.43 3.08 2.97 2.94 2.81 2.81 2.69 2.63 2.59 2.30 4.1 3.9 3.2 3.1 2.7 2.9 2.5 2.0 2.4 2.2 2.2 2.4 1.9 4.3 4.2 3.7 3.2 2.9 2.9 2.9 2.4 2.6 2.6 2.7 2.2 1.9 3.7 3.6 3.5 3.5 3.2 2.9 2.8 3.2 2.6 2.6 2.7 2.5 2.2 4.1 4.0 3.5 3.6 3.0 3.0 3.1 2.7 2.7 2.7 2.4 2.6 2.5 4.2 4.1 3.5 3.3 3.1 3.2 3.0 3.0 3.2 2.9 2.9 2.7 2.5 4.4 4.3 3.9 3.9 3.5 3.0 3.4 3.6 3.5 3.1 2.9 3.2 2.8 E B M
  32. 32. The time and cost involved in inland transportation of goods are also very high Average Transit Time (Mombasa-Nairobi)(A),(1) Share of Logistics Cost (Mombasa-Nairobi)(A),(1) 31 41% 17% 15% 13% 4% 4% 3%3% Sea Freight Shipping Port Handling Container Freight Station Charges Clearing Agent Fees +Vat Inland Routing Costs Indirect Costs of Delays Direct Costs of Delays Shipping Lines Charges  It takes ~30 hours and costs ~ $9,844 to transfer a 20 foot container from Mombasa to Nairobi  Driver delays such as rest and personal errands would normally not be necessary for such a short distance, but the various regulatory delays force the driver to rest a night during transit  The shipping line charges include fees such as delivery order fee, bill of lading fee and piracy risk surcharge 0 5 10 15 20 25 30 0 100 200 300 400 Time(Hrs) Distance (Kms) Goods transiting 430 km from Mombasa to Nairobi take ~ 30 hours on an average. The same distance in the US takes ~ 6 hours Weight Station (3 hrs.) Police Checks (2 hrs.) Driver Delays (11 hrs.) Weight Station (3 hrs.) Unloading (2 hrs.) Notes: (A) Logistics Costs and Average Transit Time of a 20 Foot Container, Mombasa - Nairobi Source: (1) CPCS Transcom (2010) Analytical Comparative Transport Costs Study Along the Northern Corridor Region Challenge: Lack of Infrastructure E B M
  33. 33. Africa forms a small share of global international trade; intra- region trade is very low compared to other regions Global Merchandizing Trade in Different Parts of the World (2013) 32  While rising relatively faster than others, African merchandise trade still accounts for a very low share of world trade  Intra-African trade remains a very low percentage of African trade with the world. Most of the intra-region trade is through land locked countries where its on its way to other destinations 0% 20% 40% 60% 80% 100% ShareinDestinationRegion Europe Asia America Middle East Africa OceaniaIntra-region Other Regions 69% 54% 56% 6% 12% 8% 31% 46% 44% 94% 88% 92% Exporting Region Challenge: Low Level of Intra-region Trade Note: (A) Includes all goods and commodities; excludes services Source: (1) Trade Map % of Total Global Trade E B M  The lack of Intra-Africa trade poses a challenge for firms hoping to have a launch pad in Africa from which it will expand to other markets
  34. 34. One reason for low level of intra-region trade is the existence of multiple economic/custom unions which do not function well and add complexity to trade 33 Regional Economic Communities in Africa Botswana Lesotho Namibia South Africa Mozambique Djibouti Eritrea Ethiopia Sudan Comoros Seychelles Mauritius Madagascar Angola DR of Congo Cape Verde Liberia Gambia Ghana Guinea Nigeria Sierra Leone Benin Burkina Faso Côte d'Ivoire Guinea- Bissau Mali Niger Senegal Togo UEMOA ECOWAS Cameroon Central African Republic Chad Congo Equatorial Guinea Gabon CEMAC SADC ECCAS COMESA Burundi Rwanda Kenya Uganda EAC Algeria Libya Mauritania Morocco Tunisia AMU Malawi Zambia Zimbabwe Swaziland Notes: (A) The above schematic is a direct adaptation from Accenture study on African consumer market to highlight the multiple economic/custom unions existing in Africa (B) Please refer to appendix for acronyms definitions Source: (1) The Dynamic African Consumer Market, Accenture, 2011 Challenge: Low Level of Intra-region Trade  There are more than 14 trading blocs in Africa with overlapping membership. Of those SADC, ECOWAS and EAC (where they share a language and moving closer to a shared currency) work best  Lot of goods are traded informally and elude the customs E B M  Poor regional trade also stifles overall growth, since for many small countries in Africa, regional trade is required to experience economic diversification, a key driver in economic growth
  35. 35. Within intra-region trade however, South Africa acts as the trade hub Major Exporters to Africa Region (2013) Share of Major Countries in Intra-region Exports to Africa 34 100% Europe, 40% Asia, 30% Intra-region, 11% America, 11% Middle East, 7% 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Total Africa Imports Share of Regions South Africa, 50% Nigeria, 6% Algeria, 6% Zambia, 4% Angola, 3% Morocco, 3% Congo, 3% Mozambique, 3% Others, 21%  A significant share of the intra-region trade in Africa is contributed by South Africa followed by Nigeria and Algeria  Nigeria’s share of intra-regional trade is smaller than its external trade, reflecting the dominance of hydrocarbons in the country’s exports Challenge: Low Level of Intra-region Trade E B M Source: (1) Trade Map
  36. 36. More than half of South Africa’s intra-region trade is with its neighbouring countries; Indeed, the SADC is one of the strongest trading hubs in Africa Regions in Africa Share of Countries in Intra-Africa Exports of South Africa 35 17% 15% 15% 9% 7% 5% 4% 4% 3% 8% 4% 4% 2% 2% 0% 5% 10% 15% 20% 25% Zambia Zimbabwe Mozambique DRC Angola Nigeria Kenya Tanzania Ghana Others Challenge: Low Level of Intra-region Trade North East West Southern Central E B M Source: (1) Trade Map
  37. 37. Much of Africa’s intra-regional trade is unaccounted for since it takes place via informal markets 36  Although there are no reliable statistics available, adding informal cross-border trade to official figures for intra-African trade would increase the share of intra-African trade in total trade  In the Southern African Development Community (SADC) area, its estimated that informal cross-border trade could amount to an additional $17.6 B a year, equal to 30-40% of formal trade  In 2009 and 2010, Ugandan total informal exports to the Democratic Republic of the Congo, Kenya, Rwanda, the Sudan and the United Republic of Tanzania were worth $790 M and $520 M, respectively  Furthermore, estimates of informal cross-border trade in West Africa show that it could represent 20% of GDP in Nigeria and 75% of GDP in Benin Destinations: Eritrea, Djibouti Merkato Market Addis Ababa, Ethiopia Kantamanto Market Accra, Ghana Mboppi Market Accra, Ghana Destinations:Burkina Faso, Togo Destinations: Chad, CAR(A), Gabon Notes: (A) Central African Republic Source: (1) UNCTAD (2) BA Analysis Challenge: Low Level of Intra-region Trade E B M Examples of Informal Trade Markets Which Facilitate Intra-regional Trade
  38. 38. With the exception of five countries, all African nations rank low on global corruption perceptions index Global Corruption Perceptions Index (CPI) Scores 37 0 10 20 30 40 50 60 70 80 90 100 Botswana Cape Verde Seychelles Rwanda Mauritius Niger Ethiopia Tanzania Mauritania Mozambique Sierra Leone Togo Comoros Gambia Chad Equatorial Guinea Guinea-Bissau South Sudan Somalia  CPI ranks countries based on how corrupt their public sector is perceived to be, where a score of 0 means highly corrupt and 100 means very clean public sector  While over the years, indicators related to human development and sustainable economic development have improved in Africa, there has been noticeable deterioration with regards to the rule of law and safety  Only five Sub-Saharan African countries score above average scores in 2013 survey. Issues include stealing, looting government coffers, rigging elections, etc. United StatesChinaIndia Top5 African Countries Bottom5 African Countries MedianAfrican Countries Note: (A) List represents top five, bottom five and those right in the middle of all African countries Source: (1) Corruption Perceptions Index, 2013, Transparency International Challenge: High Rate of Bureaucracy and Corruption World Average E B M
  39. 39. “Policy Instability” is also identified as one of major challenges associated with working in an African country Challenges of Doing Business in Sub-Saharan Africa 38 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Access to Financing Corruption Inadequate Supply of Infrastructure Inefficient Government Bureaucracy Tax Rates Inadequately Educated Workforce Inflation Policy Instability Poor Work Ethic in National Labor Force Tax Regulations Restrictive Labor Regulations Crime and Theft Foreign Currency Regulations Insufficient Capacity to Innovate Government Instability Poor Public Health % of Responses  As per the Executive Opinion Survey conducted by the World Economic Forum, policy instability is one of the key challenges of doing business in Africa. For example: – In Nigeria, imports of sugar confectionery were suddenly and without defensible rationale banned in 2000 which resulted in the exit of then major lollypop player – Chupa Chups. However, the ban has now been lifted – Similarly, import of fruit juice was also banned in 2002, and import duty for juice concentrates was reduced to 5% in the same year to push local manufacturing – Zambia, recently suddenly banned the use of American dollars in local transactions—a needless extra hassle for firms operating there Challenge: Uncertain policy environment E B M Source: (1) World Economic Forum Executive Opinion Survey (2010)
  40. 40. Benin Botswana Burkina Faso Burundi Central African Republic Chad ComorosDjibouti Guinea Lesotho Liberia Madagascar Malawi Mali Mauritania Mozambique Namibia Niger Rwanda Senegal Sierra Leone Swaziland Togo 0 3 6 9 12 15 18 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cameroon Ethiopia Gabon Ghana Kenya Sudan Tanzania Tunisia Uganda Zambia 18 28 38 48 58 Algeria Angola Morocco Nigeria South Africa 80 130 180 230 280 330 380 39 A significant portion of the African population lives below poverty line Challenge: Significant Share in Low Income Group E B M Population Living in Poverty in African Countries (LYA)(A),(1) Global Average (42%) Oil contributes significantly to Nigeria’s GDP, the profits from which do not trickle down to the population Note: (A) LYA = Latest Year Available. Source: (1) World Bank Database Bubble size indicates population in Million Population below poverty line (% of total) GDPinUS$
  41. 41. Nigeria is particularly noteworthy given its population and very large % which live at the bottom of the pyramid(A) BoP Percentage of Population(A,B), (1,2) Notes: (A) LYA – Last year available. (B) Bottom of Pyramid segment is defined as people earning less than $2.5 a day (PPP). Sources: (1) World Bank. (2) 2013 World Gazetter projections (3) Individual national government statistics (4) BA Analysis. 32% 39% 64% 76% 77% 88% 90% 93% 97% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Egypt South Africa Ghana Uganda Kenya Ethiopia Nigeria Tanzania Congo % of total population African Countries with Highest BoP Percentage Total Population (M) 75 46 177 87 43 35 26 53 85 Challenge: Significant Share in Low Income Group E B M 40
  42. 42. Note: (A) LYA = Latest Year Available. (B) Ratio of Consumer Spend to GDP per Capita is taken to show that countries with high oil money tend to have concentration of wealth with few people which results in low overall consumer spend Source: (1) World Bank Database When trying to assess the wealth of a population, it is important to note countries which rely upon high-value exports often have lower consumer spend than more diversified economies, making GDP per capita a misleading indicator in many African countries 41 Algeria AngolaChad Congo Equatorial Guinea Gabon Libya Nigeria 30% 50% 70% 90% Share Reliance on Oil and Household Spend in Africa PerCapitaConsumptionas%ofPer-capitaGDP(B) African nations with high reliance on oil and other high-value exports tend to have high GDP per-capita but relatively low consumer spend Challenge: Significant Share in Low Income Group E B M Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Côte d'Ivoire Democratic Republic of the Congo Djibouti Egypt Eritrea Ethiopia Gambia Ghana Guinea Kenya LesothoMadagascar Mali Mauritania Morocco Mozambique Namibia Niger Rwanda Senegal Sierra LeoneSouth Africa South Sudan Sudan Swaziland Togo Tunisia Uganda Zambia Zimbabwe 0% 20% 40% 60% 80% 100% 120% 0% 5% 10% 15% 20% 25% Share of Mining in GDP (%)
  43. 43. African markets are overwhelmingly characterized by traditional trade Modern vs. Traditional Retail Trade (2010) Definition 42 80% 85% 5% 20% 36% 45% 35% 34% 25% 15% 14% 10% 10% 8% 7% 4% 3% 0% 20% 15% 95% 80% 64% 55% 65% 66% 75% 85% 86% 90% 90% 92% 93% 96% 97% 100% 0% 20% 40% 60% 80% 100% UK US India China Brazil Libya Tunisia South Africa Morocco Kenya Egypt Angola Algeria Nigeria Cote d Ivoire Ghana Sudan Ethiopia Modern Trade Traditional Trade  Traditional Trade (TT) is defined as all that trade that flows through traditional outlets, such as kiosks, corner shops, local mom n pop stores, and open markets, or all trade except that which flows through retail chains, hyper markets, supermarkets, etc. is modern trade (MT) Key Points  TT is characterized by a large complex network of independently owned retailers and distributors carrying primarily local or regional brands  It can be difficult to penetrate for both national and multi- national firms given its highly fragmented nature, yet it serves as the conduit for reaching the largest percentage of the consumer population  Some manufacturers also report, despite its high distribution costs, they can reap greater margins from TT than MT retailers who negotiate hard on price Common TT Categories Food and Beverages Home Décor and Furnishing Clothing and Textile Personal Care Consumer Durables Footwear Jewelry and Watches Books, Music and GiftsSources: (1) Business Monitor International (2) BA Knowledge Repository (3) Planet Retail Research (2011) (4) Feed the Lion, FMCG Opportunities in Africa, A.D. Little Report, 2014 SelectedAfricanMarkets Challenge: Strong Dominance of Traditional Trade E B M
  44. 44. Informal trade, a sub-section of traditional trade which consists of hawkers and table tops, is a very strong channel in Africa Informal Retail Outlets in African Nations 43 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 Nigeria South Africa Kenya Cameroon  Informal retailers act as an important delivery channel of goods to consumers in Africa  These are mostly small make-shift structures such as table tops, hawkers, spaza shops, etc. which are usually located around bus stops and crowded public areas  Serving both cities and smaller towns, they primarily sell items such as snacks, beverages, fruits, bread, cigarettes, confectionery etc.  Smokers, students, drivers, passers –bys are the main customer group for table tops and hawkers Challenge: Strong Dominance of Traditional Trade E B M Source: (1) BA Analysis
  45. 45. While South Africa has one of the highest rates of modern trade penetration, Nigeria at least with respect to grocery stores is expected to witness high growth in this area Retail Environment Presence (Number of Outlets) South Africa Nigeria Kenya Modern Trade (MT) % of Grocery Retail 62% 5% 25% Current Total No. of Stores Global Retail Chains 3,000 9 0 Regional Retail Chains 7 55 Local Retail Chains 30 150 Total 3,000 46 205 Projected Total No. of Stores Global Retail Chains 3,500 50 1 Regional Retail Chains 56 100 Local Retail Chains 40-50 250 Total 3500 156 351 Note: (A) Projected total represents the total number of outlets of each type expected in the next 5-8 years for each country respectively Source: (1) BA Analysis Challenge: Strong Dominance of Traditional Trade E B M Much of the planned expansion in modern trade in Nigeria is coming from South Africa retailers 44
  46. 46. Despite ambitious projections, Nigeria is unlikely to see a dramatic increase in the total % of all trade represented by modern trade in the near future Evolution of Modern Retail(1)-(4) 45  Modern retail in Nigeria has been expanding rapidly over the past few years driven by Shoprite, Africa’s biggest retailer, Spar, Europe’s largest retail network, and Massmart, South Africa’s second-largest retailer  However, even if modern retail market in Nigeria continues to expand it won’t phase out or replace the informal markets completely which still and will continue to dominate the retailing . 1% 2% 10% 25% 55% 67% 74% 75% 80% 83% 0% 2% 5%0% 1% 34% 64% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 ShareofModernRetail USA India China Nigeria Sources: (1) (2) (3) (4) Challenge: Strong Dominance of Traditional Trade E B M It took 10 years and the contribution of many different factors for China to reach 30% modern trade penetration
  47. 47. Domestic credit from banks to private sector is relatively lower in African nations compared to other developing markets, stifling investment and growth opportunities 46 Algeria Angola Cameroon Côte d’Ivoire Egypt Ethiopia Gabon Ghana Kenya Libya Morocco Namibia Niger Nigeria Rwanda South Africa Tanzania Tunisia Uganda Zambia Brazil China India United States of America 0% 5% 10% 15% 20% 25% 30% 35% 40% 0% 20% 40% 60% 80% 100% 120% 140% CommercialLendingRates Domestic credit to private sector by banks (% of GDP) Access to Capital in Selected African and Other Markets (LYA)(A),(1) Note: (A) LYA = Latest Year Available. Source: (1) World Bank Database Challenge: Underdeveloped Capital Markets E B M
  48. 48. Africa as a region ranks lowest in the Global Talent Index (GTI) developed by Economist Intelligence Unit GTI Regional Scores 47  Africa has a significant shortage of management and specialised skills  Talent shortage is putting a strain on investment in Africa as educational institutions fail to produce the quantity and quality of skills required to meet growing business needs. 75% of the CEOs operating in African countries surveyed by PWC outlined a lack of available talent as a threat to their growth  Even when talent is identified, e.g., through a head hunter to fill senior positions, multinationals note they are only available at a very high price, comparable to European executives  Many believe the shortage of available managerial talent has become much worse since the entry of multinational telecom firms over the past ten years in Africa who offered higher wages and more senior titles in order to recruit professionals from other industries. Professional services firms, such as accounting firms, similarly followed suit. 0 10 20 30 40 50 60 70 North America Western Europe Asia Latin America Eastern Europe & Central Asia Middle East Africa Challenge: Lack of Managerial Talent E B M “I have designed my strategy and have the funding, what I need now is people. I can’t find the people I need to run the business” – Africa and Middle East Regional Director for Global FMCG Player Source: (1) World Bank
  49. 49. Indeed, in most Africa countries, educational levels fall behind developed and developing nations 48 102% 99% 112% 113% 137% 112% 111% 109% 102% 85% 79% 0% 50% 100% 150% USA Russia India China Brazil Kenya Cameroon Ghana South Africa Nigeria Ethiopia % of Gross School Enrollment (% of Gross Population) (LYA)(A),(B),(1) Primary Secondary Tertiary Notes: (A) Gross enrolment ratio. Total enrollment in an education group (primary, secondary, tertiary), regardless of age, expressed as a percentage of the population of official education group age. GER can exceed 100% due to the inclusion of over-aged and under-aged students because of early or late school entrance and grade repetition (B) LYA = Latest Year Available Source: (1) World Bank Database SelectKeyAfricanCountries Challenge: Lack of Managerial Talent 96% 89% 63% 81% 106% 60% 50% 61% 102% 44% 25% 0% 50% 100% 150% USA Russia India China Brazil Kenya Cameroon Ghana South Africa Nigeria Ethiopia % of Gross 95% 76% 18% 27% 26% 4% 12% 12% 15% 10% 3% 0% 50% 100% USA Russia India China Brazil Kenya Cameroon Ghana South Africa Nigeria Ethiopia % of Gross E B M
  50. 50. Identifying and gathering reliable data on Africa is a challenge due to the lack of credible data, inconsistent research standards, and few quality research vendors 49 Challenge: Lack of Information Ability to Effectively Conduct Primary Research In- Country E B M Credibility & Reliability Recentness of Data Availability of Fieldwork Agencies DataAvailabilityDataCollection  Africa overall suffers from a lack of credible data. Given the relatively small size of the markets that exist within many countries, few research firms have invested the effort needed to provide robust analysis of such things as market size, player shares, retail segmentation, etc. Instead, data must be gathered first-hand and triangulated in order to come up with reasonable and defensible estimates  Data from secondary sources is scattered and lacks uniformity. National governments serve as the primary source of macro-economic and demographic data in many countries. Not only is their data often considered suspect and self-serving, it is also very often outdated, particularly in countries with rapidly emerging economies  Primary research is an evolving industry in most countries in Africa. There are few long standing firms and most of them are trained only in the most conventional types of consumer market research  Finding a reliable, well trained research firm who follows international protocols, while is also creative and flexible enough to address the unique characteristics of each market is a great challenge  While respondents in Africa generally do not expect the same honorarium as those in other more developed nations, such as the US and Europe do, it can sometimes still be difficult to recruit and conduct interviews as well as gather useful insights – Given the lack of communications infrastructure, e.g., reliable phone lines in Ethiopia, it can be very time consuming to simply recruit and schedule interviews – Some respondents unfamiliar with primary research are suspicious regarding how the information might be used and may not appreciate the interviewers need for specific and detailed information – There are approximately 2,100 languages spoken in Africa with languages spoken per country ranging from 1 to more than 100 (1) Source: (1) The challenges in conducting market research in Africa, SIS International Research, September 2008 (2) Primary Research
  51. 51. Counterfeit goods are seen across product categories and appear to becoming more prevalent 50 Sources: (1) BA Analysis (2) Challenge: Proliferation of Counterfeit Goods Wood glue in Ethiopia Genuine Imitation Adidas shoe in Algeria In Algeria, from 2010-2011 the amount of counterfeit products seized by customs officials rose by 84.5% E B M  It is difficult to estimate the size of the counterfeiting industry since it is based on seizures but in East Africa alone it is believed nearly $500 million has been lost in revenue due to counterfeit goods. Indeed many firms feel as though their real competitors in these markets are not those known to them, but those making counterfeit goods Sony music systems in Kenya While most counterfeit products were originally electronic goods and medicines they now range from food products to industrial goods While in some cases, counterfeit products are exact replicas of genuine products, in other case it is just the look and feel of a dominant brand which is copied
  52. 52. Content 51 Introduction to Africa Today Regional Assessment of Africa Challenges of Accessing Consumers in African Markets Appendix Changing Consumer Market Strategies to Overcome Challenges Concluding Thoughts
  53. 53. Successfully entering and expanding in Africa often requires a very different approach 52 Recommendations to Combat Challenges Challenges Recommendations Wide Differences across Countries on Multiple Parameters  Each African country requires a unique approach and strategy. Companies should select markets based on clearly defined criteria which go beyond macro-economic parameters and appreciate local market dynamics, consumer learning, etc.  Invest appropriately in learning about the local environment. Adapt the business model and offerings to the markets, if needed Lack of Infrastructure  Invest in own infrastructure if critical to business and economically feasible (e.g., captive power in Nigeria)  Optimize cost in non-critical areas to offset investment in infrastructure and maintain profitability  Appreciate and incorporate in product development any unique environmental issues which might impact consumption (e.g., inconsistent electricity for electronics, refrigerators for food)  Invest in supplier relationships to manage raw material and supply chain deficiencies Low Level of Intra-Regional Trade  Identify true regional trade hubs to ensure maximum reach in market  Conduct robust analysis of local players to identify strong partners for entry and expansion  Follow growth of modern trade via major modern retail chains to expand across countries if modern trade is key to business Bureaucracy and Corruption  Identify a local contact or partner to manage all regulatory and policy affairs Uncertain Policy Environment  Engage in scenario planning in order to prepare for sudden changes  When feasible and warranted develop strategy to work with local policy makers  Identify means to minimize investment risk rather than avoid it Environment Business Market
  54. 54. CPG/FMCG companies need to be cognizant of local market differences when building their African strategy 53  Rather than develop an “Africa” or pan-Africa strategy, many firms now recognize they must treat each country differently, identify and prioritize the top opportunities and then pursue each with a strategy which reflects the local dynamics – For example, for the same company, the retail strategy in South Africa may focus more on modern trade, while in Nigeria, the focus may be on traditional trade. The same company may have lower distribution costs, but lower margins with modern trade in South Africa, but the opposite in Nigeria Response Global Strategy Cluster Strategy Country Level Strategy  All markets are same  Markets can be clustered in different groups based on similarities  Each market is different and should be treated in different way Relevance to Africa MarketLow High Response: Differences across Countries E B M
  55. 55. In order to address the lack of infrastructure in Africa, some companies, such as Diageo, invest in their own infrastructure and partnerships in order to support the sale of their products 54  Diageo invested in its own infrastructure to overcome challenges related to power, water supply, and consistent supply of commodities in Africa  Currently Africa accounts for nearly 13% of Diageo’s total net sales. The continent contributes 30% of Diageo’s global sales growth and 40% of its global operating profit increase Key Points/Examples  Africa represents Diageo’s largest group of emerging markets in terms of net sales. The company employs over 5,300 people through the production, distribution and promotion of its brands  Diageo invested in Africa to create integrated supply chains: it built production sites with their own power and water supplies  It invested in local suppliers, in developing a sales force and in working jointly with distributors to enhance their capabilities  Diageo sources 70% of grain for its breweries and spirits production facilities locally. It invests in developing agriculture locally. Not only does this allow them greater control over their inputs, it helps them better manage their foreign exchange volatility Sources: (1) (2) Response: Lack of Infrastructure E B M Response “You really need to be able to generate at least 80 percent of your own power requirements by yourself either by embracing solar energy which some companies are doing or buy powerful generators. Power is a real challenge to industrialization in Nigeria.” — Nestle Business Manager, Nigeria
  56. 56. Avon relies on local post offices to distribute their products and make payments in South Africa where the infrastructure is otherwise poor in rural areas  While global sales only grew by 1% in 2011, Avon’s sales in South Africa grew by 29%  Avon has provided local women with a viable employment opportunity by improvising and utilizing innovative means to manage distribution, credit and payments for their products Market Approach  In hard to reach rural areas with few roads and even fewer formal street addresses, Avon sends the products to local post offices where the reps pick them up and redistribute them to locals. Post offices and/or large local retailers are also used as pick-up spots for pay checks  Without a well established formal credit histories, Avon has also improvised by creating a simple scoring system related to one’s personal assets, e.g., ownership of a cell phone, demonstrations of responsibility and permanence to establish their credit worthiness Source: (1) The Economist, August 18, 2012 South African Post Office Avon Sales Reps in South Africa 55 Response: Lack of Infrastructure E B M Response
  57. 57. Multiple companies have adapted to the lack of infrastructure by changing their product formulations Key Points/Examples 56  Promasidor is an African dairy and beverage company headquartered in South Africa – In 1979 Promasidor launched Cowbell brand of powdered milk with an objective to make milk accessible to all Africans – Promasidor replaced the animal fat with vegetable fat in its Cowbell milk powder to give it a longer shelf life, thereby diminishing the dependency on cold supply chain – Promasidor‘s small sachet packs reduce the price point, but also provide an added benefit of enabling children to pour the powdered milk directly on their tongues and avoid concerns about finding fresh water  Unilever has developed a low-cost climate stable margarine which doesn’t require refrigeration in order to combat the lack of cold chain in Africa  P& G’s Ariel brand of detergent in Africa is designed to lather quickly thus reducing the water needed to wash clothes  Promasidor tailored its product in Africa to overcome challenges related to supply of freshwater and availability of milk  Unilever has redesigned a wide range of products from food items to household products to address the lack of refrigeration and water in Africa  Similarly, P&G has introduced household products which address the lack of clean water Sources: (1) (2) Response: Lack of Infrastructure E B M Response While Promasidor was the first powdered milk firm to develop a more shelf stable product in response to the lack of cold chain, many firms with other products have followed suit, changing either their packaging or formulation Unilever’s Shelf Stable Blue Band Brand P&G’s Quick Lather Ariel Brand Promasidor’s Cowbell Brand
  58. 58. The high rate of mobile phone penetration in Africa has provided many firms with an opportunity to overcome other infrastructure limitations Key Points 57  Mobile phone penetration in Africa is widely reported to be higher than 80% and smart phone penetration ~18%  Mobile phones are being used to transfer money, buy products online and manage money through such things as credit, savings, and insurance programs. Mobile money transfers alone are expected to exceed $200 billion by 2015 according to the World Bank – Tanzania is reportedly the leader in M-Commerce (Mobile Money Services) across the Sub-Saharan African markets, followed by Kenya, South Africa, Ghana, Nigeria and Uganda – Tanzania also leads in Mobile Payments for airtime top ups, merchants, bills and salary payments by 60%, followed by South Africa 19% and Ghana by 6% – Multiple new innovative M-Commerce products are being built now on the M-PESA platform which can be operated on simple no-frills phones  Safaricom introduced the M-Pesa concept in 2007 in Kenya which is a mobile-phone based money transfer and micro-financing service  MTN Ghana has launched the Mobile Money Bill Payment service to facilitate payment of electricity and DSTV (satellite TV service) bills for subscribers Sources: (1) OC&C Global 50, 2013 (2) Africa's mobile boom powers innovation economy,, June 30, 2014 (3) Mobile penetration landscape in Africa, SSCG Response: Lack of Infrastructure E B M Response “Before camera phones, I had to travel to remote places to collect the payment confirmation receipts from distributors/retailers, or wait for the payment to be transferred to my account to dispatch goods.. Now, I ask my customers to take picture of the payment confirmation receipt and send it to me through phone and the goods are dispatched right away” – Area Sales Manager, Dangote group, Nigeria There are currently over 600 Million mobile phone users in Africa. 1/3 of third of Kenya’s GDP takes place through mobile transactions
  59. 59. Dark and Lovely Though few in number, regional distribution houses can offer a faster expansion route to MNCs Key Points 58  L’Oreal recently signed a protocol agreement with Compagnie Française de l'Afrique Occidentale (CFAO) covering production and distribution of cosmetic products in Ivory Coast  This agreement will provide L’Oreal access to – CFAO’s distribution network – Its knowledge of African countries and markets – CFAO’s production facility for cosmetics and packaging components  With this agreement, L’Oreal intends to strengthen its presence in French speaking African countries and speed up its expansion in Sub- Saharan Africa  MNCs such as L’Oreal partner with specialized distribution firms focusing on Africa, and leverage their experience to enter or expand in Africa  In some cases, large distribution houses may also offer manufacturing or packaging support to its principals Sources: (1) L’Oreal Brands For Africa Response Response: Low Level of Intra-Regional Trade, Lack of Local Information The distribution and production partnership with CFAO is part of a strategic plan for the L'Oréal Group in Ivory Coast and French-speaking West Africa. Ivory Coast is a fast-growing market where beauty products have a strong appeal among local consumers. It is crucial for L'Oréal to increase its presence in these expanding markets - Managing Director, Africa Middle-East Zone, L'Oréal' "Our strategy in West Africa is to offer major international brands a manufacturing and distribution tool suited to the markets they wish to tap into. This new partnership is fully in line with CFAO's strategy of encouraging the consumption of innovative, quality products in West Africa. - Chairman, CFAO's Management Board Garnier E B M
  60. 60. For the most part, the firms which grow in Africa accept rather than fight the characteristics which define these markets, in terms of trade, the consumer population and local financing 59 Challenges Recommendations Significant share of population in low income group – low purchasing power  Design strategy to lower product price and ensure reach  Work with distribution partners who have proven record in reaching low-income consumers  Identify and use innovative means to reach out to lower income customers, including possibly partnering with other manufacturers who have good reach and complementary products rather than developing own distribution Strong dominance of traditional trade (TT)  Segment, prioritize and address relevant TT segments  Identify right set of distribution partners with ability to reach TT outlets Underdeveloped capital markets  Identify, evaluate and possibly employ alternative means of access to capital Environment Business Market Recommendations to Combat Challenges
  61. 61. Similar to other emerging markets, the most common response to the large low-income populations in Africa, is offering smaller SKU sizes Key Points/ Examples 60  In Nigeria, to target the lower income groups, PZ Cussons introduced three different pack sizes for “Zip” detergent and five pack sizes for “Morning Fresh” cleaners  Also in Nigeria, Reckitt Benckiser offers a bottle of Harpic for 120 naira (~ $0.75) in order to combat the otherwise high cost of the product  Nespray, an instant milk powder from Nestle, contains calcium, zinc and iron - all essential for children. It is sold in a 250g pouch that costs only a few rand (< $0.50)  In East Africa, Colgate is sold in small tubes to respond to limited purchasing power of local consumers; joint toothpaste and toothbrush promotions are also common across Africa  In Nigeria, P&G sells Ariel by the ounce, enough for a couple of wash loads. Most people buy it from the street side vendors of Lagos, where a 1-ounce packet of Ariel costs $0.10. Diapers are marketed as one-a-day items: "One Pampers equals one dry night". A pack of 10 sells for $ 2.30  In South Africa, Danone and local dairy group Clover launched a project selling individual pots of vitamin-enriched Danimal yoghurt for 1 rand (~ $0.14) for the BoP segment  Consumer product companies launch small SKUs or lower priced (value for money) offerings in African markets (similar to the strategy adopted in other emerging markets such as India)  Companies use innovative grass root distribution models to reach out to BoP customers usually in rural and underdeveloped areas Source: (1) (2) (3) Primary Research. (4) BA Analysis. Response: Significant Share of Population in Low Income Group Response E B M
  62. 62. The large presence of traditional trade and smaller sized retailers typically requires companies to work with multiple entities to ensure their products reach the final retailer 61 Source: (1) BA Primary Research Jobbers International/Local Production Unit Local Entity Distributor Sub-distributor Micro Stores (Kiosks) Retail Chains Groceries TT Outlets (e.g., Dukas) Forecourts Wholesalers DirectSalesTeam  Emerging markets of Africa requires a multi-pronged distribution approach  The first step to identifying the key channel entities involved in the distribution of a product category and designing an effective route-to-market strategy is to identify the target retail segments and trace back their means of procurement Response: Strong Dominance of Traditional Trade Response E B M
  63. 63. Since there are very few large distributors in Africa, companies must work with and rely upon a large network of distributors to ensure coverage Key Points/ Examples 62  To expand its coverage in Nigeria and penetrate rural areas, Promasidor has established a large fragmented network of 600 distributors in Nigeria (it is one of the largest distribution network in Nigeria) which in turn reach out to other sales channels – wholesalers, retailers, table top stores and others – Promasidor’s market leadership ensures that its distributors stay loyal to it. The company provides attractive margins, marketing support and fridges to some of its distributors  Heineken uses a 3-tier distribution structure in Nigeria (super key distributors, wholesalers and bulk breakers), reaching almost 400,000 retail points – 25% of Super Key Distributors (SKD) have NB–exclusive warehouses enjoying preferential trade terms – Large sales force to secure exclusive SKD to retail delivery – Customer bonding programme including credit facility, bonus rebates, seasonal promotions, pallets, annual customer award and birthday gifts  Nestlé delivers directly to spaza shops (informal convenience stores) in South Africa which make up about 30% of the national retail market. Many of these are in remote areas and owners often cannot afford delivery vans. Nestlé has set up 18 distribution centres that deliver to spazas. It charges them the same prices as bigger outlets  Promasidor uses a large network of distributors to penetrate TT trade in Nigeria  Heineken and Nestle deploy multi-level distribution networks in Africa to create strong presence in traditional trade Sources: (1) A continent goes shopping, The Economist, August 2012 (2) Nigeria: Huge country, huge beer market potential, Heineken, Amsterdam, November 2009 (3) Primary Research Response: Strong Dominance of Traditional Trade Response E B M
  64. 64. In order to strengthen the capabilities of traditional trade outlets and gain greater favor with them, some manufacturers provide complementary business services Key Points/ Examples 63  “Golden Store” program to improve channel partner economics – P&G employees help improve and remodel independent stores in rural areas in Nigeria – P&G overhauls the outside appearance and the inside design of remote stores, and provides software and other expertise to help boost and track sales – In exchange, logos of P&G brands are prominently displayed outside the stores, products are given preferential shelf space and store owners become ambassadors for P&G products  Coca-Cola provides South African retailers with advice on shelving and merchandizing as well as free drink coolers  In South Africa, SABMiller has helped illegal taverns convert into licensed outlets by assisting with the application process and leading information workshops. SABMiller has also made all license applicants eligible for training in customer care, stock management, book keeping, credit control, and responsible alcohol use  P&G provides multiple business services to retailers in exchange for preferential treatment Source: (1) OC&C Global 50, 2013 Response: Strong Dominance of Traditional Trade Response E B M “We have created over 120 new successful entrepreneurs with sustained training and marketing support in rural and semi-urban areas over the past five years.” – Manoj Kumar, MD, P&G Nigeria
  65. 65. CPG/FMCG firms must be proactive in order to address the business challenges they face in Africa Challenges Strategies Lack of managerial talent  Define clear processes and KPI (key performance indicators) for local teams  Invest in training and development of local team, if need be  Build in retention plans to ensure you are not training for competitors Lack of strong manufacturing and distribution local partners/ acquisition targets  Build your list based on local market visit and channel feedback  Segment and understand exact type of partner sought, given local market definitions (importer, distributor, wholesaler, etc.)  Identify and sequence criteria to ensure you do not “boil the ocean” and metrics are relevant given local environment  Think strategically and creatively, e.g., find partners dealing in multiple brands and products to ensure penetration, Piggy back on other people's network to reduce investments  Invest in local partner for capability and growth Lack of local information  Quickly identify and evaluate local sources of information  Treat market intelligence as an asset. Invest in market information  Have plan for continuous intelligence development  Identify areas of collective research where you can cooperate with competitors. Promote industry associations Environment Business Market Recommendations to Combat Challenges 64
  66. 66. Some manufacturers are actively engaging in developing the necessary managerial talent Key Points 65  Diageo’s Africa Early Career Programme is a development programme offering roles and experience from day one. The company recruits people across African nations and provides positions in supply chain, finance, HR, sales and marketing  The three-year programme includes both functional training and leadership development. Functional training helps trainees gain skills, knowledge and experience while leadership training encourages thinking, and drives change  People spend time with sales force out in the field to increase their commercial awareness to understand brands, customers, etc.  Diageo launched a pan-African graduate program to accrue hundred graduates each year to ensure a pipeline of talent going forward Source: (1) Response: Lack of Managerial Talent Response E B M
  67. 67. To close “the last mile” of distribution, some firms build their own partners 66  Coca-Cola’s MDCs of manual distribution centers are independently owned, low-cost businesses created to service emerging urban and rural retail markets where classic distribution models are not effective or efficient  The MDC model identifies and engages independent entrepreneurs, who receive business training and in some situations financing  Started in Ethiopia, Coca-Colas now runs more than 32,000 MDCs in more than 15 countries in Africa, employing over 19,000 people and generating more than $950 M in revenues for Coca Cola Source: (1) Developing Inclusive Business Models, Harvard Kennedy School and International Finance Corporation. (2) (3) Developing Inclusive Business Models, Harvard Kennedy School and International Finance Corporation. (4) Micro Distribution Centers – Concept(1–3) MDCs Transporters Retail outlets Distribution of product is mostly manual (e.g. by pushcarts) to keep costs to a minimum A central point for warehousing of products, with a manageable coverage area and defined customer base (typically about 150 retail outlets) MDCs typically serve low-volume outlets located in more difficult to reach areas, with limited cash flow and high service frequency requirements Response: Lack of Distribution Partners Response E B M
  68. 68. Similarly, firms have invested in mobile micro point of sales to ensure adequate reach Key Points 67  Danone set up a separate network of distributors called ‘Dani Ladies’ to promote its low cost dairy product designed in partnership with dairy partner Clover – "Dani Ladies" are trained to sell in open-air markets or door-to-door in townships – Danone provides a uniform, a cooler box, a trolley, support and training, but the saleswomen must pay for the product in advance after a pilot credit system was deemed unsuccessful  FanMilk in Africa directly employs around 1,500 people in production and administration and creates income opportunities for more than 20,000 vendors and street hawkers. Employees and vendors of FanMilk are generally the breadwinners of families  Both Danone and FanMilk have successfully used mobile carts to close the last mile and reach end consumers in difficult to access places which have little infrastructure Sources: (1) Danone Sustainability Report 2006 (2) Dani Ladies on front line of push to sell to poor, Reuters, June 2007 Dani Ladies in South Africa Response Response: Lack of Distribution Partners FanMilk Vendor E B M
  69. 69. Companies facing multiple challenges sometimes resort to completely different models 68  Jumia, an e-commerce site in Africa has responded to challenges with inter-regional trade, managerial talent and infrastructure by:  Creating an extensive network of transportation vehicles to fulfill orders and make delivery to end consumers across Nigeria, using regional warehouse for order fulfillment outside Nigeria  Sourcing talent from among the pool of non-resident Nigerians who have received education form renowned institutions globally, and are looking to come back  Implementation of cash on delivery model to address lack of payment infrastructures Key Points/Examples  Jumia started with Nigeria, and, within a short span of time, opened warehouses in other important African countries such as Egypt, Morocco, Kenya and Cote d'Ivoire – Jumia also expanded to other African countries such as Uganda, Tanzania, Cameroon, Ghana; – Jumia supplied goods to some of the above countries from warehouses established in larger countries such as Kenya and Nigeria  Jumia ensures timely delivery of goods in all 36 states of Nigeria, building trust among the consumers; this is possible only through significant investment in supply chain infrastructure  To address the challenge of finding right managerial talent, Jumia recruits young and passionate Nigerians from all over the world, who wish to return to their home country  In addition, Jumia is also funded by seasoned investors that helps them gain access to right people in the industry to work for them  One of the main reasons why e-commerce didn’t grow rapidly in Africa until now is the absence of reliable payment infrastructures and low usage of credit cards. Jumia solved this implementing cash on delivery service for its products wherein its employees collect cash at the time of delivery from the consumer directly Sources: (1) Company websites and annual reports (2) Responses: Lack of inter-regional trade, managerial talent and infrastructure E B M Response “We’ve done two things. One is we’ve raised money from very smart investors who can get us access to top-notch talents. And the second thing we’ve done is we’ve gone around the world to find Nigerians who want to come home. We’ve gone to recruit at Harvard Business School, at MIT, at Oxford, at London Business School” -Company Founders “For all of its consumer potential, the evolution of Nigeria’s online retail industry has been hampered by an absence of payment infrastructure and a relatively low penetration of credit cards. Jumia, “Africa’s Amazon”, solved this by sending out its products on bikes and collecting cash payments” - How we made it in Africa
  70. 70. Content 69 Introduction to Africa Today Regional Assessment of Africa Challenges of Accessing Consumers in African Markets Strategies to Overcome Challenges Changing Consumer Market Appendix Concluding Thoughts
  71. 71. Concluding thoughts 70  Africa represents one of the last frontiers in terms of underpenetrated emerging markets. Compared to other emerging markets, we are in early days of understanding, prioritizing and exploiting the opportunity. It is alluring because, for some, it represents a chance to enjoy a first mover advantage, an opportunity that is not available in most product categories in other emerging markets any more. For others, it represents an opportunity to continue to grow as other international opportunities become more saturated.  In any case, Africa’s story is a forward looking story of “promise”, as the factors needed to create and sustain a market for international products are just beginning to come together and coalesce. In order to truly emerge as a viable market, it still needs active investment from manufacturers in ways that are unfamiliar and sometimes unheard of in other more developed nations. These investments can range from investments in the supply chain to investments in distributors and in some cases, retailers, as well as in new product developments.  Furthermore, while there are a few commonalities across countries in Africa, the size and attractiveness of the opportunity differs greatly by country. Africa needs to be seen as a set of individual countries from which manufacturers and retailers must cherry pick opportunities, and not as an entire continent ripe for entry. In order to succeed, manufacturers and retailers, must do their homework, tailor their strategies to the unique characteristics of each market, accept and work with the realities of underdeveloped markets, provide sufficient support and make a commitment for the long hall. As early research shows, rewards are available for those who do the above.
  72. 72. Content 71 Introduction to Africa Today Regional Assessment of Africa Challenges of Accessing Consumers in African Markets Strategies to Overcome Challenges Changing Consumer Market Appendix Concluding Thoughts
  73. 73. Definition of LPI index 72  The Logistics Performance Index is an interactive benchmarking tool created to help countries identify the challenges and opportunities they face in their performance on trade logistics and what they can do to improve their performance. The LPI is based on a worldwide survey of operators on the ground (global freight forwarders and express carriers), providing feedback on the logistics “friendliness” of the countries in which they operate and those with which they trade. They combine in-depth knowledge of the countries in which they operate with informed qualitative assessments of other countries where they trade and experience of global logistics environment. Feedback from operators is supplemented with quantitative data on the performance of key components of the logistics chain in the country of work. Source: (1) World Bank Appendix
  74. 74. By 2020, Africa will comprise 17% of the world’s population and 3% of the global GDP Share of World Population Share of World GDP 73 60% 59% 15% 17% 14% 13% 11% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2010 2020 Asia Africa America Europe Others 34% 32% 30% 27% 28% 33% 3% 3% 5% 5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2010 2020 America Europe Asia Africa Others Appendix
  75. 75. By 2050, three African countries will make the list for the top 12 most populated countries in the world, when none made the cut in 1950 74 Note: (A) Bangladesh didn’t exist as a country in 1950, Historical estimates made using modern borders Source: (1) UN: The Economist Appendix China India United States Russia* Japan Indonesia Germany Brazil Britain Italy France Bangl adesh * 0 1 2 China India United States Indonesia Brazil Pakistan Nigeria Bangladesh Russia Japan Mexico Philippines 0 1 2 India China Nigeria United States Indonesia Pakistan Brazil Bangladesh Ethiopia Philippines Mexico Congo 0 1 2 1950 2013 2050 forecast Most Populous Countries (in billion)
  76. 76. 75 Lagos Kinshasa Cairo Alexandria Abidjan Ibadan Kano Casablanca Cape Town Addis Ababa Harare Nairobi Giza Dar Es Salam Dakar Luanda Tripoli Algiers Omdurman Accra Rabat Conakry Kaduna Khartoum Douala Durban Johannesburg Pretoria Soweto Lusaka Mogadishu Brazzaville Yaoundé Maputo Lubumbashi Port Harcourt Free Town More than 3Million More than 2 Million but less than 3 Million More than 1 Million but less than 2 Million Population of African Cities West Africa, led by Nigeria, has the maximum number of cities with population exceeding 1 million The largest cities exist along the coast and are predominantly in West Africa Appendix Source: (1) 50 Largest Cities in Africa, The African Economist, December 2012 data Large population cities in Africa (2012)
  77. 77. Most of the major markets in Africa have nearly 30% or more population in the age bracket of 25-54 years Age Structure 28% 43% 32% 42% 43% 28% 17% 21% 18% 19% 19% 20% 43% 29% 38% 33% 31% 38% 6% 4% 7% 4% 4% 7% 5% 3% 5% 3% 3% 6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Algeria Angola Egypt Kenya Nigeria South Africa 0-14 years 15-24 years 25-54 years 55-64 years 65 years and over Appendix Source: (1) CIA World Factbook 129
  78. 78. Africa looks more like India than other emerging markets in terms of the below additional demographic points of comparison 77 Region Africa Brazil China India Russia Share of Urban Population (2011) Share of Working Age Population Above BoP Population 40% 85% 51% 31% 74% 55% 68% 74% 65% 72% Source: (1) IMF World Economic Outlook Database 37% 89% 73% 31% 100 % Appendix
  79. 79. Definitions of acronyms used in the presentation 78  UEMOA: West African Economic and Monetary Union  CEMAC: Central African Economic and Monetary Community  ECCAS: Economic Community of Central African States  COMESA: Common Market for Eastern and Southern Africa  EAC: East African Community  ECOWAS: Economic Community Of West African States  SADC: Southern African Development Community  AMU: Arab Maghreb Union Appendix
  80. 80. For more information contact: Kimberlee Luce Senior Vice President