Heart of darkness: challenges in the consumerisation of Africa

Nelson Mandela’s 95th birthday last Thursday is cause for celebration, but also reflection on where his vision is headed. The rainbow nation of South Africa continues to make strides in spreading opportunity, but for too many people on this continent real development is more a dream than a plan. This month’s edition of Foreign Policy magazine, for instance, includes its annual list of failed states. The top five are all African.

SCM World’s Executive Advisory Board met recently and, among other key directives, tasked us to learn more about Africa. The imperative is all about growth, especially for consumer products companies, many of which are stuck with low growth rates in the big markets of Europe and North America. Africa offers a billion consumers, but what is the plan for getting to them?

I met this week with Dougie Truter, the CEO of Imperial Logistics Africa, whose current footprint includes all of southern Africa to the Cunene River and also most of eastern and western Africa. This includes the two most frequently discussed key markets for an African CPG strategy: Nigeria and Kenya. These two countries are relatively big, relatively rich and logistically essential to regional success. They are also both in Foreign Policy‘s top 20 failed states (Nigeria ranks 16th and Kenya 17th).

Failed states list for 2013

Source: Foreign Policy

Micro-stores are the big opportunity

How does Imperial manage to operate dozens of facilities and serve demanding customers like Reckitt Benckiser and Johnson & Johnson in such challenging places? By following the same demand-driven principles that work elsewhere: start with the customer and work backwards to define a supply chain. In Africa this means facing the fact that informal retail dominates traditional (aka “formal”) grocery and general merchandise retail by as much as 5:1 in volume terms.

For supply chains this includes dramatically smaller scale fulfilment all the way down to hand carrying individual cases into thousands of micro-stores. Some, like Coca-Cola and South African Breweries, have painstakingly built this capability in house. For most companies the question is how first-world consumer product fulfilment models need to change to suit local conditions.

Extensive academic research by Jan Fransoo at Eindhoven University of Technology in the Netherlands on what he calls “nanoretail” in megacities suggests that costs are higher and complexity greater but growth much faster.

Pan-African strategies won’t work

The other critical insight pioneers offer is that Africa must be broken down regionally into clusters of logistically contiguous markets. For sub-Saharan Africa there are essentially three regions of near-term importance:

Southern Africa. Easiest by far, southern Africa includes well-developed and essentially western consumer products markets in South Africa, as well as tiny but stable and easily accessible markets in Namibia and Botswana, and significant, if less developed, markets in Mozambique, Zambia and Malawi.

Traditional supermarket-style retailers like Shoprite, Pick n Pay and Woolworth’s may not be as sophisticated as Kroger, Walmart or Sainsbury’s, but familiar approaches to CPG growth will work here. Informal retail is meaningful and does require a different fulfilment system, but is not an absolute requirement to at least establish a beachhead.

Eastern Africa. Kenya is critical, but expensive and plagued by corruption. It is, however, the best place to start and provides relatively easy access to solid market opportunities in Uganda, Tanzania and Rwanda. Kenya does suffer a bit from the “Zanzibar effect”, by which I mean extensive mafia-like traders who sell smuggled product that is cheaper for having skipped the payment of duties and is readily accepted by the extensive informal retail channel.

Companies should plan on reduced margins when competing here for market share. Also critical is a 5-10 year plan to access the very large Ethiopian market which, although socialist and still focused more on government-driven infrastructure projects, will likely grow fast upon opening.

Western Africa. Nigeria is the key, but not the whole story. As an oil rich nation of 163 million people, Nigeria is a must have for any African growth plan, but it is still corrupt, hard to navigate logistically and complex and costly as an export platform. As such, many CPG companies will find Ghana an appropriate alternate market beachhead that is stable, accessible and English speaking.

Stanford University’s recently funded Institute for Innovation in Developing Economies is opening its first mission in Ghana this autumn/fall. Adjacent markets include mostly French-speaking countries, some of which are substantial like Senegal, but also dangerous and difficult countries like Mali, Guinea and Cote d’Ivoire.

Phase two, or later

This discussion has skipped a number of countries, including some big ones like the Democratic Republic of the Congo and Egypt. Those along the north coast have overriding political issues, which when solved leave a string of big, ancient cities easily accessed from the Mediterranean. Those unmentioned, and largely central African, countries are probably too hard to even attempt for any purpose outside humanitarian goals.

To be fair also, this two-minute primer on opening Africa is certainly oversimplified and little more than a basis for discussion. The urgency is that brand-building, channel development and organisational preparedness won’t happen overnight. CPG companies that move too soon may get burned, but those that move too late will find the boat has sailed.

Kevin O’Marah
Chief Content Officer
SCM World

Please contact me directly with any comments, questions or suggestions. I welcome your feedback.