The African opportunity

By Professor Leif M. Sjöblom, Ishtiaq Pasha Mahmood and Christopher Zintel
with Lindsay McTeague
Contributors: Stéphane Paquier, Jonathan Ledgard, Ramon Bastida, Terrence Taylor, Nganga Wanjohi and Hischam El-Agamy

More than 40 executives attended an IMD Discovery Event that delved into some of the opportunities and challenges of doing business in Africa, the third fastest growing region in the world. The guest contributors ranged from senior executives in multinational and African companies to a local entrepreneur and a senior journalist with a particular interest in the continent. The participants, from a variety of industries and companies with different exposure to Africa, shared their experiences and contributed to the debate.

Africa is larger than the United States, China, India, Japan and the whole of Europe put together (see map), yet many in the West are ill-informed about it: If there’s a riot in Liberia, companies want to pull out of Nairobi in Kenya more than 5,000 km away. A lot of attention is being paid to BRIC countries, but Africa hardly rates a mention, except in a negative context. Yet over the past decade, six of the world’s ten fastest-growing countries were in Africa. With a population of over one billion – the fastest growing and youngest in the world – and an emerging middle class, Africa has consumers who are more prosperous today than ever. However, the sheer number of countries (54), currencies, languages and physical and cultural borders – not to mention poor infra-structure, corruption and political instability – are major obstacles for businesses interested in capitalizing on the Africa Opportunity.

Opportunities and Challenges

While most foreign investment targets the populous and more developed countries such as South Africa, Nigeria and Kenya, there are opportunities for doing business throughout the continent. Stéphane Paquier, president of Dow Africa, cited some positive megatrends:

• Large and growing consumer class: A recent African Development Bank report found that Africa’s middle-class consumers now constitute more than a third of its population, over 300 million people, which matches India.1
• Wealth: Contrary to perceptions, several countries in Africa – including Libya, Algeria and Angola – have no debt and a considerable amount of money to invest in any vision for the future.
• Nutrition and agriculture: Africa has most of the non-cultivated land in the world.

This is balanced with the recognition of common challenges that multinational corporations (MNCs) face:   

•  Commitment: MNCs have struggled with being consistent and having a long-term commitment to African markets. This is often down to ignorance and lack of direct experience.
• Visibility from headquarters: It is hard to attract business partners and support within the executive team.
• Cultural differences: Face to face relationships are valued above all others and patience is needed to cultivate them.
• Supply chain to the continent is long and expensive: Until infrastructure improves, there will be challenges in bringing products to Africa.
• Corruption: A zero tolerance approach to corruption is essential from the start of new alliances and joint ventures.
• Threats to intellectual property rights: MNCs need to protect their IP and fight against counterfeit products.
• Difficulty of benchmarking: How do you know what your competitors are doing?

Jonathan Ledgard, Africa Correspondent for The Economist, believes that there will be economic growth in many African countries, but the key issue is whether the growth is inclusive and if all of society benefits. The population of Africa will reach an estimated 2 billion in the next 30 years, and currently over 50% of the population in sub-Saharan Africa is under 19 years old. Africa is poised to benefit from a “demographic dividend” – a huge number of youth entering the workforce. This young talent must be harnessed to maximize opportunities and avoid political and social risk.

The combination of economic growth and population growth means that the big future for Africa has not yet been written. However, factors such as frustrated youth due to unemployment; the effects of climate change, which could lead to food shortages; and non-inclusive cities could lead to a disconnect, with some parts of Africa advancing while others are left behind. Technology and urbanization will be the big drivers, offering the chance to rethink what a city might be like – 800 million new people will be living in cities that do not even exist yet!

Ramon Bastida, senior manager marketing, EMEA for Eaton Corporation, highlighted the megatrend of increasing power needs throughout Africa as the population explodes, and the imperative to use energy more efficiently, sustainably and safely. He also pointed out the need to separate risks into three categories when deciding how to invest in Africa – political, ethical and economic. But he also stressed that it is impossible to do business without taking on some risk and that all geographies have their own inherent risks.

Asked about their biggest concerns over doing business in Africa, participants overwhelmingly noted the distribution challenge and the quest for talent.

The Distribution Challenge

How can companies reach the emerging consumers at the bottom of the pyramid? Nganga Wanjohi, CEO of Kaskazi Network Ltd, described how his company manages the distribution of fast-moving consumer goods (FMCGs) to low income areas (slums) in Kenya using bikes and motorcycles. He has capitalized on opportunities in the fragmented Kenyan micro retail market, consisting of over 130,000 kiosks, primarily in low income areas. This market, which represents 75% of the Kenyan retail market, has been largely neglected by many FMCG companies.2

The system works on hourly credit, which means timing is critical. Typically traders’ stock purchases are divided into two categories: daily purchases, such as milk, bread, cigarettes and airtime, and periodic purchases, such as tea, coffee, flour, sugar and oil. The cash float for buying stock is based on these two categories and Kaskazi needs to have a predictable sales cycle to ensure a “share of float.” If the cycle is too short, traders may be overstocked; too long and there are stock-outs. Far from being just a margin game, the business is built on relationships and loyalty. Sales people make 40 to 50 calls a day, immediately uploading details of each transaction onto the company portal.

Wanjohi identified how his company manages some of the key distribution challenges in low income areas:

 Kaskazi has developed an in-depth understanding of the entire supply chain and relies on extensive market data and real-time analytics to make decisions on how to serve its customers and create consumer awareness of their brands.