Analysis: African growth offers wide opportunity to SA consumer goods firms
Economy / 6 June 2014, 08:00am / Nompumelelo Magwaza
Johannesburg - The growing populations and economies of countries elsewhere in Africa present an opportunity for South Africa’s fast-moving consumer goods (FMCG) companies to lift their returns faster than they would locally.
This is one of the insights shared by John Geel, the head of transactions and restructuring at KPMG, with Business Report this week.
Geel said factors influencing these trends included increasing urbanisation and stronger gross domestic product (GDP) growth, which over time would trickle down into higher income of the growing middle class and have an impact on consumption patterns.
The FMCG categories that could benefit ranged from food, clothing and personal care products to entertainment, Geel suggested.
He added that local companies interested in doing business elsewhere in Africa should know that these countries were “complex, with different elements in each country”. For example, Nigeria had a population of about 174 million in 36 states each with a different economy.
He said it was estimated that, in 2016, the east African region, which included Kenya, Tanzania, Uganda and Ethiopia, would have more than 240 million people.
“If South African FMCG companies can capture these new markets, they will be able to grow their returns faster than they can locally.”
According to KPMG’s sector report on FMCGs in Africa, poverty levels, especially in sub-Saharan Africa, are still quite high, so food and other necessities dominate household budgets.
this reason, the food sub-sector of FMCG has a very large market to cater for, while penetration rates in the other categories still have significant room to expand,” the report states.
A number of South African retailers and food companies, such as Shoprite, Spar, Edcon, Mr Price, Tiger Brands and Pioneer Foods, have made inroads in some of these countries, it said. However, trading has not been a smooth road. Woolworths and Shoprite have pulled out of Nigeria and Tanzania, respectively, citing difficulties in market penetration.
Regarding political upheaval in Nigeria, Mr Price has stated that it would limit its business to the south.
KPMG’s report singles out Shoprite and SAB Miller as two companies that have been able to extend their presence on the continent.
According to another report by KPMG, titled “Africa’s consumer report”, alcohol is another product category, in addition to food, that is likely to see strong growth in Africa over the next few decades.
KPMG said beer and spirit producers were among the largest listed companies in many African countries, with multinational beverage companies such as SAB Miller, Diageo and Heineken already having a presence. For example, Nigerian Breweries and Guinness Nigeria had market capitalisations of around $6.7 billion (R72bn) and $1.7bn, respectively, which was equivalent to a combined 11 percent of the Nigerian stock exchange’s total market capitalisation.
According to Deutsche Bank Market Research, Nigeria is Africa’s largest consumer of alcohol.
Another key driver is the growth in urbanisation rates. The UN forecasts that sub-Saharan Africa’s urbanisation rate will reach 45.9 percent by 2030 and 56.7 percent by 2050 from just 36.3 percent in 2010.
As GDP per capita increased, Geel said, people would start moving into branded products.
He said because of complexities surrounding import tariffs and poor supply chain infrastructure it was better for companies to offer products that had already been established. “If a company is looking at importing its products, it must be aware of import tariff increases on certain products, especially in Ghana and Nigeria.”
He also warned of the level of informal trade.
Nigeria and Ghana still traded on informal platforms, while it was different in countries like Zambia where Mr Price, Pick n Pay and Shoprite had a presence.
In Ghana, informal markets dominate food retail, while Shoprite and two domestic companies, Melcom and Maxmart, were the main players in the supermarket food.
Kenya’s food retail sector is well developed with the four main local players being Nakumatt, Tuskys, Uchumi and Naivas. Massmart’s attempts to acquire a stake in Naivas have failed but the company is still looking to expand in Kenya. In personal care, Unilever is the market leader in Kenya.
The report adds that, in the oral care market, Unilever faces competition from Colgate-Palmolive brands.
In Nigeria, food retail is still dominated by informal trade, the report notes. However, this is starting to change with the entry of supermarkets and an increase in the number of shopping malls. The most important supermarket chains in Nigeria are Artee Group’s Park n Shop, Spar stores and South Africa’s Shoprite.
At present, Shoprite has seven stores in the country and is in the process of adding a further 37 branches. Massmart has also set up smaller format stores owing to the difficulty in getting access to large tracts of land in Nigeria, the report says.
Geel added that another important strategic element was that a lot of the companies in those regions were looking into partnering with global players and South African companies.
“There is no doubt that if South Africa partnered with local entities it can be a mutually beneficial relationship; there is also potential for them to export their products.”
The soft drink trade in most of the countries mentioned above was dominated by Coca-Cola, Geel explained.
However, in Nigeria, innovative domestic companies such as La Casera were gaining market share, he noted.
He said that, despite the infrastructure and supply chain difficulties, opportunities abounded for FMCG companies to expand. Experience and patience were among elements that were considered essential to unlocking these markets. - Business Report