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Africa Insights ‒ Gaps in formal retail fosters opportunity for daring investors
The fast moving consumer goods (FMCG) industry, also known as the consumer packaging industry, represents the low-margin, high-volume turnover goods that customers buy on a daily basis. As such, the industry is inherently tied to sizeable and growing population centres, and runs tightly in parallel to the logistics industry.
As Africa’s population has rapidly expanded over the last two decades, it has also begun to urbanise, creating fertile ground for growth within the FMCG space. Opportunities have, in turn, emerged along an entirely new sales and logistics chain, and more are likely to follow, thanks to sustained income growth on the continent.
That being said, to succeed in Africa’s booming FMCG market, investors will need to proceed with a mixture of courage and caution, creating new digitally based sales chains, integrating with the local informal sector, and firmly keeping in mind the limitations posed by the continent’s infrastructure shortfalls.
Africa is the world’s fastest developing continent, in terms of both economic and population growth, expected to house more economically ascendant young people than any other region in the world in the coming decades. The rapid urbanisation which accompanies this growth creates thriving urban centres that are able to absorb large volumes of low-margin products, which FMCG retailers need to sell in order to remain profitable.
The impact of Africa’s sprawling new urban centres has been monumental; in 1980 less than 30% of the population lived in these urban centres, today this figure is close to 40% and is expected to rise to 50% before the decade is out. With Africa already projected to house a fifth of the world’s population and host 100 urban centres with populations exceeding one million by 2025, the potential demand for essential goods alone will only increase.
Big players in the global FMCG space have already begun to move on these opportunities, with roughly 70% of global multinationals already invested in the continent to some degree. However, new entrants expecting consumer patterns identical to more developed countries should tread cautiously. The mileage of formal retail operations across Africa varies, with better developed markets, such as South Africa, dominated by formalised retail chains, while in other growing economies, like Ghana and Nigeria, informal traders and street vendors remain popular across all income brackets. The experience of South African retailers expanding across countries like Angola, Botswana, Ghana and Kenya has shown that there is space in developing markets for formal operations. One example is Accra Mall in Ghana’s capital, which has seen an average of 138 000 shoppers a week since its opening in 2008.
A Shoprite outlet in Zeerust, South Africa. The retail chain has become one of the largest in Africa, boasting nearly 3 000 outlets and employing close to 150 000 people in 15 countries. Image courtesy: Ossewa/WikiCommons
Higher income earners create changing demand patterns
Retail investment in Africa has traditionally been low due to the limited spending power of local consumers, who often prioritise essential food stuffs over aspirational items, such as electronics. However, thanks to a protracted commodities boom and sharp growth in the local service sector over the past 20 years, the continent now accommodates an increasingly prosperous middle class, who have an awareness of global trends and a consumer appetite to match. By 2030 it is expected that over 40 million African households will have an income of US$5 000 or more, dramatically reshaping the local consumer profile.
Preliminary signs of this trend are already visible in African states that have become middle-income countries, such as Kenya, where retail outlets have grown by up to 54% since 2014. While ten years ago the country’s consumer price index would have included primary items like paraffin stoves, today such examples have been phased out to make way for university expenses and home entertainment systems.
In South Africa, research has shown that as tastes evolve, an increasingly large body of consumers will seek organic healthy foods to purchase. Higher income earners also have an impact on the provision of basic food stuffs, particularly with regard to increased meat and dairy consumption. Meat consumption per capita across Africa is expected to increase from 19kg a year to 26kg a year by 2050, while demand for milk is likely to increase from 44kg per person per year to 64kg.
FMCG contributes to development of auxiliary industries
Retail growth in Africa has evolved hand in glove with the expansion and development of focal auxiliary industries. The local agriculture and manufacturing industries are key contributors to a country’s FMCG space, with retailers having to establish stable and trustworthy distribution channels.
Many retailers in Africa choose a vertical integration approach to market operations. For example, Zambeef in Zambia has invested in its own logistics division, with one of the largest trucking fleets controlling the entire supply chain from farm to shop. Zambeef has also set up its own chicken houses and abattoirs, rather than relying on third-party farmers. Kenyan retailer, Maxi, has conversely developed a programme aimed at developing the capacity of farmers to supply its stores with fresh produce, by offering technical support and facilitating distribution logistics to achieve this.
Along with retailers integrating with the logistics and distribution of produce, there have been some notable trends of creativity in shaping the supply chain structure of products across Africa. Heineken and Diageo, two of the world’s largest beverage brands, have established African-based breweries in order to bolster their market share, as well as establish a local manufacturing base on the continent. Unilever has created its own production capacity in South Africa to cater for the country and other markets in which the company operates. Shoprite, Africa’s largest food retailer, has prioritised to source 80% of its produce locally in both Nigeria and Uganda. In those particular markets, the brand marketing campaigns include ‘Buy Uganda, Build Uganda’, and ‘Made in Nigeria’ to support local production and ensure quality local produce.
Sources: AfricaScope, 2020; Geopoll, 2019; Euromonitor, 2019; World Bank, 2019
Gaps in local supply chains create opening for logistics firms
The two biggest stumbling blocks in the development of a healthy FMCG industry in any region are a lack of high density population centres and a lack of supporting infrastructure. Whilst Africa’s population growth has solved the former problem, the latter still needs to be mitigated against. This creates new opportunities for investors willing to explore opportunities to expand local supply chains where chronic bottlenecks throttle the development of FMCG outlets.
The longest running shortfall of the local retail market is the lack of reliable and efficient ‘cold chains’, which are essential for the transport of frozen goods, pharmaceuticals and other perishables that require consistently low temperatures. In frontier markets, this drastically narrows local retailers’ options for sourcing their products, disincentivising the development of large-scale agro processors, and promoting economic inefficiencies.
Fortunately, local innovations are making the prospects of such investments far less daunting than in other markets. Founded in 2014, Twiga Foods, a distributor for small scale farmers in East Africa, has made use of its own InspiraFarm cost-saving refrigeration system, which utilises 70% less energy than its nearest industrial competitor. The use of such creative thinking to overcome local infrastructure shortfalls will be key for the materialisation of any meaningful expansion into the continent’s frontier markets.
A key opportunity for retailers in the FMCG sector is making greater use of geospatial data and geographic information systems (GIS) in analysis of consumer purchasing patterns. The use of GIS provides retailers with a competitive edge in capitalising on Africa’s burgeoning retail sector. Benefits of using GIS include finding the most suitable locations to set up shop in respect to consumer demand, while also identifying the locations of competitors, what products they offer, and the marketing strategies that they employ.
Despite the modernisation of retail in Africa, there is an emerging market in secondary towns, known as ‘boom towns’, which should not be discounted. In Kumasi, Ghana, property developer AttAfrica is constructing a major mall, which has very little formal retail space, even though Kumasi is an important trading town in the country. In Nigeria, Resilient Africa is constructing malls in lesser-known cities such as Asaba and Benin City. Without the use of GIS data, retailers would tend to focus on urban, mainstream locations instead of tapping into these boom towns.
The operations of Nestlé in Kenya would have benefited from GIS data. In 2018, the multinational company was forced to reorganise its operations by shutting down its headquarters in Nairobi, citing unfeasible costs given the lack of sales volume in the East and Central African regions.
An open market in Accra, Ghana. Though the country relies heavily on informal traders in getting goods to market, it has a bourgeoning FMCG sector, with malls becoming commonplace. Image courtesy: Anzola/Flickr
E-tailers offer superior market access through bypassing physical supply chain constraints
Though the formal retail sector is growing in Africa, it is often not possible for large, formalised retail outlets to situate themselves in neighbourhoods cost-effectively. Reasons for this include high local construction costs, and poor transportation infrastructure, which lacks the capacity to support such ventures. With the advances in e-commerce services, however, these no longer need to be insurmountable impediments.
Online retailers, or ‘e-tailers’, are still fairly nascent to Africa compared to more developed markets. Nevertheless, the sizeable success of African online retailers such as Nigeria’s Konga and Jumia and Takealot in South Africa points to a future where the digital sales chain might override the brick-and-mortar one in terms of market prominence, provided certain fundamentals such as widely available internet and mobile money access hold true for the regions in question.
Source: World Bank, Oxford Business Group, 2019
COVID-19 could cause supply chain hiccups
The COVID-19 pandemic and associated lockdowns have been the biggest setback to African supply chains over the course of 2020, and with second waves in some of Africa’s main trade partners, including the EU and US, the chances of further disruptions should not be discounted.
COVID-19 outbreaks among staff members at packing plants or warehouses have the potential to shut down production at key points in the supply chain, causing long delays that may result in business failure for already constrained African logistics providers. Such disruptions were frequently experienced by logistics companies in East Africa around the beginning of the lockdown period, as this region was dependent on exports from India and China, in particular chemical products like fuel and pharmaceutical precursors.
Social distancing regulations mean that retailers will have to limit the amount of customers they can trade with at any given time, which might lead to a greater emphasis on online sales to clear bottlenecks in limited physical outlets.
Africa’s infrastructure, particularly transportation and distribution networks, is not as well developed as other parts of the world. FMCG companies experience significant challenges, including poor road networks, underdeveloped rail systems and congested ports, which collectively lead to an escalation in import costs and affect the transport and distribution of goods and raw materials. Such infrastructure shortcomings have contributed to the increasing presence of the informal sector in poorly-connected rural regions.
Despite these setbacks, there are a number of encouraging new infrastructure projects that will bring about growth, including the recently commenced new port developments in the coastal town of Kribi in Cameroon, and in Tanzania where a US$10 billion investment will see the construction of a new port and Special Economic Zone (SEZ), expected to be the largest port in Africa. Upon completion of the Lamu Port and Lamu-Southern Sudan-Ethiopia Transport Corridor Project in Kenya, a standard gauge railway line and road network will connect inland countries like South Sudan and Uganda to sea trade routes to Asia.
Investment in Africa is not straightforward to painlessly raise profits. New entrants to local markets routinely fail because they discount the unique spending patterns of local consumers. Even established brand names like South Africa’s Shoprite and Mr Price have struggled to maintain the same success as in their home country, due in large part to their inability to win over hearts and minds when it comes to consumer loyalty toward informal traders.
Any successful African retail strategy must therefore incorporate the informal sector in its operating model if it wishes to succeed, and can benefit from doing so, as the overwhelming presence of the informal sector indicates that the cost of doing formal business is still too high.
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