Posts Tagged ‘fmcg’

As global firms (MNC) pull back from emerging markets, what does this mean for Africa?

tumblr_nwsbz0ytDw1qghc1jo1_500Last week’s issue of The Economist drilled down deeper to cover the retreat of globalization – at least in the most visible form, that of the multinational brands dotting cityscapes around the world. The retreat of the global company, they trumpet, the end of Theodore Levitt’s vision.

Credit Suisse takes a concise yet comprehensive look at these weak signals in their well-written report that frames the situation as a transitional tug of war between globalization and multipolarity – an inflection point, rather than a retreat. They make it sound like missing the turn at an intersection and having to come back to the traffic lights to figure out which way to go.

Duncan Green of Oxfam captured the essence well:

But the deeper explanation is that both the advantages of scale and those of arbitrage have worn away. Global firms have big overheads; complex supply chains tie up inventory; sprawling organisations are hard to run. Some arbitrage opportunities have been exhausted; wages have risen in China; and most firms have massaged their tax bills as low as they can go. The free flow of information means that competitors can catch up with leads in technology and know-how more easily than they used to. As a result firms with a domestic focus are winning market share.

In the “headquarters countries”, the mood changed after the financial crisis. Multinational firms started to be seen as agents of inequality. They created jobs abroad, but not at home. The profits from their hoards of intellectual property were pocketed by a wealthy shareholder elite. Political willingness to help multinationals duly lapsed.

Of all those involved in the spread of global businesses, the “host countries” that receive investment by multinationals remain the most enthusiastic.

The first thing to note is that the global MNCs being considered by The Economist are primarily the legacy ones  – fast food chains like McDonalds and KFC (Yum Brands) – whose shiny logos used to represent the liberalization of the closed markets of India and China.

Even at powerhouses such as Unilever, General Electric (GE), PepsiCo and Procter & Gamble, foreign profits are down by a quarter or more from their peak.

or the few examples of emerging market brands that have gone global such as China’s Lenovo which purchased IBM’s Thinkpad and India’s Airtel which bought into the African market.

What’s being touted as their competition are regional brands, who aren’t as stretch out globally in terms of their supply chains, and less vulnerable to currency volatility. Further, the majority of these global brands are heavily dependent on their B2C marketing and sales – the question of whether they ever managed to understand their new markets is a topic for another post.

And so, we ask, what will this mean for the emerging economies of Africa, who are only now seeing the first fruits of FDI? Who will come and develop their consumer markets?

India and China apparently. And strategically – through unbranded affordable commodities and the acquisition of successful regional consumer brands – rather than the legacy MNC approach influenced by Levitt. Even Japan recognizes this, as they seek to piggyback on the Indian experience.The economics of scale that propelled the first rounds of growth for the manufacturers of washing machines and the automobiles never did make sense infrastructurally for the majority of the African consumer markets.

Instead, the patterns pointed out by The Economist and Credit Suisse imply that opportunities will lie among regional stars – Equity Bank of Kenya, for instance, whose regional footprint is surely but steadily creeping outwards across the East African Community and trading partners – or, the telcom brands such as Tigo (Millicom) who innovate for each of their local markets.

The jobs and exports that can be attributed to multinationals are already a diminishing part of the story. In 2000 every billion dollars of the stock of worldwide foreign investment represented 7,000 jobs and $600m of annual exports. Today $1bn supports 3,000 jobs and $300m of exports.

Godrej, for instance would be considered a regional Indian giant rather than a multinational in the conventional sense of a Unilever or P&G.

Where [MNCs] get constrained is, they are driven by lot of processes that are global. For a smaller organisation like us, we are completely empowered; decision-making is quick and we can initiate changes very fast. We are more agile and have an advantage over them.

Yet their expansion outside India shows a “pick and choose” strategy of markets they’re comfortable entering.

The group’s acquisition strategy hinges on identifying unlisted companies built by entrepreneurs looking for capital, picking up stakes and working with them to scale up their businesses.

At least two homegrown Kenyan FMCG brands – skincare by a global giant and cosmetics by private equity – have been acquired. As have snack foods, spices, dairy products, and other products that cater to local tastes. The best known being Fan Milk of West Africa. Private equity such as Abraaj make no bones about going after consumer driven opportunities.

Given these choices, sustainable African businesses who understand their consumer markets have an opportunity to establish their brands and grow – with the financial help that’s strategically becoming available.While Chinese imports make the market highly competitive and price conscious, fish and tyres are substitutable goods in a way skincare and cosmetics are not.

African consumer companies – formal, informal, or semi-almost there-formal – need to hustle right now.

The retreat of the MNCs offers a chance to exhale, and expand, and grow, but the advent of the East implies waking up to the need for serious strategic thinking about domestic comparative and competitive advantage – one of which is incomparable knowledge of local consumers, culture, and needs, and critically, experience of their vast informal sectors and cash intensive economies.

Japan’s Indian Strategy for the African Consumer Market

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One of the most high-profile events Kenya has hosted since independence begins this week when heads of state from across Africa and the Prime Minister of Japan Mr Shinzo Abe jet in for the Tokyo International Conference on Africa Development (TICAD). It will be the first time that Ticad has been held outside Japan and it is an honour to Kenya to have been picked to host this event. ~ Daily Nation editorial

The Nikkei Asian Review has been preparing for days with longform articles on the African consumer market, and other opportunities for Asian businesses. While Indian B2C investments have been closely analysed (and embraced), it is clear that the East Asians are eyeing each other as their closest competitors.

Africa was once dominated by Western investors, due to ties forged in colonial times. But Chinese companies have muscled their way in, and Indian, Japanese and South Korean players are arriving and thriving. This intense competition is no longer just about extracting minerals and materials. It is about tapping the next big consumer market.

Their articles are well researched and provide ample insights for businesses contemplating these new markets. Here are some highlights that caught my eye:

Vivek Karve has a clear picture of the ideal African market. The chief financial officer of India’s Marico, a maker of hair and body care products and other fast-moving consumer goods, said his company targets countries with “per capita GDP under $5,000, many mom-and-pop shops, low penetration of multinationals and political stability.”

There’s little handwringing over lack of data or missing middle class metrics. Inadequate infrastructure and informal retail in Africa is no different for your average Indian FMCG brand than their domestic market, thus the concept of the ideal market being one full of little mom and pop shops.

Marico’s strategy for achieving that includes promoting local brands familiar to African consumers, rather than pushing products that are popular in India. It uses multiple distributors to cushion itself against credit risks.

The Japanese, having already faced off with the Koreans in India’s large, diverse, and fragmented markets, are ready to take a leaf from the Indian playbook for their foray into the African market.

The gap between Asian and Western rivals is expected to narrow over time, with China making up much of the ground. About 3,000 companies from China — Africa’s largest trade partner since 2009 — are doing business in sectors such as infrastructure, resource development and telecommunications.

And even this focus on infrastructure development and large scale investments is changing. The Chinese idea is to boost purchasing power across Africa and turn the continent into a massive consumer market.

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Nissin Foods launched locally sourced sorghum noodles in Nyama Choma flavour in Kenya

The Japanese are preparing the ground to apply their own strengths in Africa. Japanese companies see Africa as a lucrative but daunting challenge — one they would rather tackle with a partner or subsidiary that is familiar with emerging markets.

This, again, is where India comes in. Toyota Motor, Honda Motor, Nissin Foods Holdings and Hitachi all export from their factories in India to Africa. The Japanese government is actively working to help companies make inroads in India as a springboard to Africa.

A couple of years ago, the Ministry of Economy, Trade and Industry compiled a list of potential Indian partner companies with strong African operations in 16 fields, including beverages, consumer goods, retail, electronic parts and auto components. Godrej Group and Marico were among them.

The lessons of the last quarter century are driving a new collaborative strategy. My rupees and yen are on Asia.

Breaking bulk and profiting at the margins

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Photo Credit: Michael Kimani

Michael sent me this information from Nairobi last week. He’d spotted informal retail within the context of a mini-supermarket – known as traditional trade in the jargon of consumer product distribution and retail. He adds,

“So 500 ml of Rina cooking oil retails for 120KES, 1 litre for 195 KES. What the owner of this store found out is buying a 20 litre (which she retails for 2700 KES) and repackaging it into 1 litre  plastic bags in red basket), is more profitable according to attendant doing this – Each bag retails for 135 KES”

Quick math informs us that she’s not giving her customers an out – the retail price for the 20 litre jerry can works out to 135 KES per litre. On the other hand, purchasing an informally packaged plastic bag over the formal product packaging offers you savings of 60 KES and helps stretch the grocery budget a little more.

A search online shows me an e-tail website whose prices for Rina are even higher – 500 ml at 121 KES, 1 litre at 214 KES and the 20 litre at 3,300 KES.

This behaviour isn’t just seen in Kenya or the African continent – I’ve documented it in The Philippines, and in rural India.  Its the natural outcome of the purchasing patterns influenced by cash transactions and irregular incomes – of the retailer as well as their customers.

Without contextual knowledge of the operating environment of the vast majority of trade and services in the informal sector, implicit assumptions left unquestioned pose their own barriers to sustainable growth.

For Mama Biashara, it’s these margins that provide a little wriggle room for profit, while offering some added value to her customers.

Emerging Markets Competition – this time its technology

Around twenty years ago, when the Indian and Chinese markets first opened up to global brands, many were surprised to discover domestic incumbents were stronger than they had imagined.

Proctor & Gamble’s laundry detergents battled for the Indian housewife’s attention and share of wallet. It wasn’t just their usual competitor Unilever either but indigenous upstarts like Nirma, who’d carved out the low price category all by themselves.  Other FMCG brands faced varying degrees of pressure, with a wide variety of outcomes, some of which still haven’t settled down. Even Coca Cola, the planet’s favourite refreshment, wasn’t immune to the local preference for Limca and Campa and Thumb’s Up.

Now, as the African emerging markets similarly capture global attention, there’s a new trend in pushback. Uber’s Nairobi entry hasn’t been unchallenged, as local apps leverage their greater local knowledge of the way things work. Ben Bajarin has already noted that in each of the major emerging markets of the developing world, its local incumbents in e-commerce, apps and hardware who take the lead.

Being overlooked for decades as a serious market seems to have had the same effect in the key sub Saharan economies as being closed off from the outside world had on the Indian and Chinese markets. Local solutions have grown and flourished. Market entry will not be a cakewalk and its a dangerous assumption for new entrants to make.

How can I end this short note without mentioning MPesa, Kenya’s inimitable and ubiquitous mobile money transfer system? Mobile payments have overtaken credit cards as the preferred cashless mode for transactions.

Technology is the new consumer product.

Market forces transforming the African retail landscape

Cosmetics giant L’Oreal’s partnership with pan African e-commerce platform Jumia signals a big shift in the way consumer packaged goods companies  address the challenge of reaching the emerging African consumer classes in a cost effective manner. A combination of market forces and on the ground realities points to this solution as a sweetspot for optimal outcomes.

Business challenge for cosmetics

On their website, they acknowledge the complexity of informal distribution networks as a major barrier to cost efficient and optimal reach.

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Source: L’Oreal website

At the same time, they recognize that their largest markets are served by the very same fragmented and informal retail networks that pose such a challenge to their distribution and sales.

Connectivity and Communication

Smartphone penetration is growing exponentially across the African continent, as is the phenomenon of online retail. When you consider the trends, its not difficult to make the informed assumption that the customer segment representing this early majority is urban, affluent and informed. They are also likely to be the most relevant segment for international cosmetic brands.

Getting in on the ground floor

Given these factors, it makes sense for L’Oreal to leapfrog the entire distribution chain, with its diversity and informality, and make straight for their customer’s doorstep.

As e-commerce businesses grow and develop, they are changing the landscape of the retail and distribution environment, offering brands a way to quickly and easily (as well as cheaply) test the waters with their product range before investing in more extensive sales and distribution channels.

These early partnerships are a signal of the way the ambitions of the globally connected African consumers aren’t going to be held back by the limitations of their environment.

Why Indian FMCGs eagerly enter African Consumer Markets

neilson4retailACM2015 This chart from that Neilson retail study on sales of Fast Moving Consumer Goods (FMCG)  shows how Kenya’s retail sector is  significantly more formalized than India’s.

Given their decades of experience with their vast, informal markets, is it any wonder that India’s consumer brands find the East African market an attractive proposition?  Their visibility in the marketplace was already being noted more than 7 years ago and this gives rise to some interesting questions even as the Western world is only now waking up to the opportunities.

In large part, Godrej’s success can be attributed to its measured, localized approach. While it imports synthetic fibers and henna leaf powder from India and Asia, the company uses those materials to mix its colorants and weave its extensions in Africa and markets its products under African brand names that cater to specifically to African consumers.

Similarities between the Indian and African business climates have helped as well. Godrej’s experiences in fragmented markets and with middle-income consumers have no doubt proved critical to the company’s impressive performance on the African continent.

Back when India’s markets first liberalized, I was a wee fish in the large domestic pond of advertising and marketing. Numerous global brands rushed in to this untapped market with its erstwhile burgeoning middle class, not dissimilar to what is currently going on across Africa.

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Darling products, Nakumatt LifeStyle, Nairobi Kenya Aug 2010 Photo Credit: Niti Bhan

Many were surprised out of their complacent imported market entry strategies by the entrenched domestic incumbents refusal to give way to global leaders in soaps and cornflakes. Price wars and sachet games ensued. Two decades later, we find new product categories and evolving consumer tastes but ye good olde brands still standing.

What will happen across the traditional trade segment in East Africa?