A Guide to Navigating your way through the African FMCG ‘savanna’.
Despite some of the challenges there remains much for optimism doing business in Africa. There are encouraging economic growth rates predicted for 2020 and beyond in a number of African countries. The growth expected in these markets provides a major attraction to retail and consumer companies looking to the future.
However, the relative weakness of many emerging market currencies has meant a higher risk of tightening monetary policy (with its resultant impact on customer’s wallets), exchange controls and of course increased import costs for retailers. Managing the effect on their operations (in particular their cost base) of volatile currencies will continue to be a focus for distribution and retail in Africa.
Besides the size of the population and spending power, other key growth drivers of the FMCG market include population density, infrastructure development, downstream industry effectiveness, economic policy and business legislation. Population density essentially refers to the number of individuals located in close proximity to one another. A large population scattered over a large territory does not represent a particularly appealing prospect from an FMCG perspective. Weak infrastructure, especially in relation to electricity supply and road networks, will also adversely impact on the FMCG sector within a particular country.
Population Density – FMCG retailers need a stable flow of consumers purchasing their products on a daily basis, so they have to operate in a local market with a large enough size. In other words, markets with higher urbanisation rates usually offer better FMCG prospects. According to the UN Population Division, there are 53 urban agglomerations in Africa with a population of more than one million.
By 2025, the UN expects there to be 84 agglomerations in Africa of at least one million people, of which 17 are forecast to be located in Nigeria. Furthermore, by that time, the UN forecasts that Africa will boast four mega-cities and 12 agglomerations with a population in excess of five million people.
Downstream Industries – Certain FMCG products by nature have very short shelf lives, such as certain foods and dairy products. As a result, it is often necessary for retailers to rely on local supply chains to ensure product wastage is kept to a minimum. That said, downstream industries do not always exhibit the necessary degree of efficiency and flexibility required to keep customers satisfied while simultaneously driving gains on the bottom line. For this reason, many FMCG retailers opt to vertically integrate where possible, be it through buying a stake in a local packaging store or establishing a wholly-owned manufacturing plant in close proximity to the local market. In some cases, the costs associated with establishing an effectively functioning supply chain may outweigh the benefits on the sales side and as a result, multinational firms might decide not to invest despite the market possibly exhibiting adequate FMCG demand potential.
Economic Policies and Legislation – A country’s economic policies, quality of institutions and prevailing legislation hold significant implications for FMCG markets and the business environment in general. For instance, while trade barriers are not necessarily a bad thing, if such regulations simply aim to protect inefficient local producers they can be extremely harmful to the economy. In this case, foreign companies not willing to depend on the unreliable local supply chain will have to pay more to import products. Changes to input costs have major implications especially in the FMCG landscape, where slightly higher prices could result in a loss of market share.
Since FMCG distributors & retailers generally sell products that can be classified as necessities, income per person is a less important consideration than for retailers of luxury or durable products. The trend in income levels is however still important in order to establish what types of FMCG products can be offered to a specific market. In addition, over time, retailers would want to benefit from shifts in consumer spending patterns as they move up the income chain.
When focusing exclusively on FMCG products, it is immediately evident that for poorer households the main food items represent larger shares of total expenditure. Considering the lower income group first, cereals, grains and wheat accounted for 31% of total household spending in 2010. In fact, when adding meat & fish and vegetables & fruit, this figure increases to 76%. Households in this group spend very little on dairy, alcoholic beverages, tobacco and personal care. However, as one moves higher up on the income ladder, it becomes evident that more was spent on these product categories, predominantly on account of the fact that individuals can consume only so much food and higher income households thus have funds left to spend on “non-essential” FMCG products. Interestingly, this trend does not seem to apply to the meat & fish product group, seeing as higher income households spend proportionately more on this product than lower income households. This can be ascribed to the fact that higher income households can more easily afford to make meat & fish a larger part of their daily diet, and as such consume less grains and vegetables.
It is critically important for FMCG distributors & retailers to ensure they are properly informed about the needs and lifestyles of consumers in African countries. This will ultimately inform decisions around products, pricing and marketing. African consumers are certainly brand and quality conscious, but affordability remains the key consideration when purchasing decisions are made. A good example of this is Unilever, which sought to lower prices and improve affordability by reducing pack sizes, which in turn allowed the firm to target low income households.
Marketing that is a local fit – Brand awareness is low in general across sub Saharan Africa. To build brand awareness, it is advised that multinational brands & retailers leverage the influence of western brands and countries. Furthermore, OC&C disputes the marketing effectiveness of traditional “above-the-line broadcast media” and proposes firms focus more on physical and digital marketing. A good example of direct marketing relates to Coca-Cola supplying its fridges to local retail outlets. Meanwhile, Nestlé used local entertainers to market the company’s products while Heineken supplied outlets with branded beer matts, fridges and draft taps.
Get creative with the supply chain – International FMCG retailers wishing to enter the African market need to carefully evaluate all possible supply chain models. While simply importing the product is certainly the option requiring the smallest initial capital investment, possible drawbacks include import tariffs in addition to the fact that products are often delayed at ports. A number of African countries have introduced foreign investment incentives in recent years. Although these regulations differ across countries, they usually involve some kind of tax holiday and favourable terms on imports.
Examples of multinational FMCG retailers which opted to establish a manufacturing base in Africa include Diageo, Heineken, Nestlé and Unilever. Heineken and Diageo have acquired local breweries to bolster market share as well as for establishing local manufacturing bases. OC&C further notes that Unilever and Nestlé have “both deployed significant capital investments to build their own manufacturing capacity in Africa, notably Unilever in South Africa.”
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