Business Day

Scramble for Africa amid shift in global economy

Africa may be the next best place to look for a new growth engine.

Par Andrew Tymms and Tiaan Moolman

First published on avril 16, 2012
min


When Africa proved resilient to the 2009 global downturn, South African companies without a presence in the rest of Africa started taking another look, and those already selling there realised it was time to boost their presence and increase their footprint. A host of factors contributes to a rosier picture of Africa. Its total gross domestic product (GDP) of $1,5-trillion is similar to that of Brazil, India or Russia, and it is expected to grow faster than most non-Brics emerging markets. While instability still plagues some nations, political risk has diminished over the past 20 years. And a new consumer class is emerging so quickly that total consumer spending is expected to double by 2020. According to Euromonitor and the African Development Bank, the continent’s middle class already accounts for one-third of the population. In eight years, five major countries alone will have 56-million middle-class households with disposable incomes totalling more than $680bn. Consumption spending per capita matches India or China. Growth opportunities are huge for companies that can tackle such challenges as poor infrastructure and a talent shortage. The trouble is, the continent is quickly attracting competitors. More than 70% of the global top 50 makers of packaged consumer goods are already present. For 20% of this top 50, Africa already represents more than 5% of global sales and most also enjoy strong profitability. Intensifying competition is narrowing the window of time for companies to successfully enter, expand or shape the landscape to their benefit. But before moving, it is critical to understand a few characteristics of this unique continent to best frame how to successfully tap into it. Foremost among the considerations is where to enter and to expand. In most emerging markets, you can carefully plan your expansion by first establishing yourself in the biggest markets, then in the primary regions or cities, and finally the smaller regions or towns. But in the rest of Africa, following such a logical and disciplined sequence may prove difficult. You may choose to start in the nine markets that, in addition to SA, account for 75% of Africa’s GDP: Egypt, Nigeria, Algeria, Morocco, Angola, Libya, Sudan, Tunisia and Kenya. Depending on your category, you may also need to prioritise other markets from the next tier. But what is often critical for success is the flexibility to quickly jump on opportunities, even if they arise in an unexpected order. The continent’s fragmented markets, quickly changing political and regulatory environment and shortage of local incumbents with scale mean global players need to act swiftly to acquire promising companies that become available or jump on opportunities opened up by privatisation. A second important consideration is how independent you can afford to be in Africa. Few, if any, packaged consumer goods companies have succeeded on their own. Partnerships and acquisitions are inevitable. Winning companies look for opportunities: brands with strong competitive positions or robust equity with local consumers, companies with route-to-market capabilities or players that offer production capacity or access to supply. Winners also understand that the availability of acquisition targets often varies among markets and categories. The average size of an acquisition is usually smaller than elsewhere and with higher risks. To minimise those risks, many players start by holding the majority position in joint ventures, with an escape clause in case the venture fails. As they learn more about the company, they can increase control or move to a full-blown acquisition. A final consideration: which categories, products or brands should you sell? As in many other developing markets, instead of entering local categories to gain ground, you can push your existing core categories and brands. Even if your category is underpenetrated, there’s room for rapid growth. To launch consumption in underpenetrated categories, leaders can invest in consumer education. Entering or expanding in Africa may appear daunting because of the continent’s complexity. No company can depend on a single operating model to quickly expand. But our research shows that the rest of Africa is not significantly more challenging than many other emerging markets. As growth slows in developed markets and categories in other emerging markets quickly consolidate, Africa may be the next best place to look for a new growth engine. Andrew Tymms and Tiaan Moolman are Bain partners in Johannesburg.

When Africa proved resilient to the 2009 global downturn, South African companies without a presence in the rest of Africa started taking another look, and those already selling there realised it was time to boost their presence and increase their footprint.

A host of factors contributes to a rosier picture of Africa. Its total gross domestic product (GDP) of $1,5-trillion is similar to that of Brazil, India or Russia, and it is expected to grow faster than most non-Brics emerging markets. While instability still plagues some nations, political risk has diminished over the past 20 years. And a new consumer class is emerging so quickly that total consumer spending is expected to double by 2020.

According to Euromonitor and the African Development Bank, the continent’s middle class already accounts for one-third of the population. In eight years, five major countries alone will have 56-million middle-class households with disposable incomes totalling more than $680bn. Consumption spending per capita matches India or China.

Growth opportunities are huge for companies that can tackle such challenges as poor infrastructure and a talent shortage. The trouble is, the continent is quickly attracting competitors. More than 70% of the global top 50 makers of packaged consumer goods are already present. For 20% of this top 50, Africa already represents more than 5% of global sales and most also enjoy strong profitability.

Intensifying competition is narrowing the window of time for companies to successfully enter, expand or shape the landscape to their benefit. But before moving, it is critical to understand a few characteristics of this unique continent to best frame how to successfully tap into it.

Foremost among the considerations is where to enter and to expand. In most emerging markets, you can carefully plan your expansion by first establishing yourself in the biggest markets, then in the primary regions or cities, and finally the smaller regions or towns. But in the rest of Africa, following such a logical and disciplined sequence may prove difficult.

You may choose to start in the nine markets that, in addition to SA, account for 75% of Africa’s GDP: Egypt, Nigeria, Algeria, Morocco, Angola, Libya, Sudan, Tunisia and Kenya. Depending on your category, you may also need to prioritise other markets from the next tier. But what is often critical for success is the flexibility to quickly jump on opportunities, even if they arise in an unexpected order. The continent’s fragmented markets, quickly changing political and regulatory environment and shortage of local incumbents with scale mean global players need to act swiftly to acquire promising companies that become available or jump on opportunities opened up by privatisation.

A second important consideration is how independent you can afford to be in Africa. Few, if any, packaged consumer goods companies have succeeded on their own. Partnerships and acquisitions are inevitable. Winning companies look for opportunities: brands with strong competitive positions or robust equity with local consumers, companies with route-to-market capabilities or players that offer production capacity or access to supply.

Winners also understand that the availability of acquisition targets often varies among markets and categories. The average size of an acquisition is usually smaller than elsewhere and with higher risks. To minimise those risks, many players start by holding the majority position in joint ventures, with an escape clause in case the venture fails. As they learn more about the company, they can increase control or move to a full-blown acquisition.

A final consideration: which categories, products or brands should you sell? As in many other developing markets, instead of entering local categories to gain ground, you can push your existing core categories and brands. Even if your category is underpenetrated, there’s room for rapid growth. To launch consumption in underpenetrated categories, leaders can invest in consumer education.

Entering or expanding in Africa may appear daunting because of the continent’s complexity. No company can depend on a single operating model to quickly expand. But our research shows that the rest of Africa is not significantly more challenging than many other emerging markets. As growth slows in developed markets and categories in other emerging markets quickly consolidate, Africa may be the next best place to look for a new growth engine.

Andrew Tymms and Tiaan Moolman are Bain partners in Johannesburg.