Strategic Recommendations for a Packaged Foods Company to Double its Africa Turnover

Posted in Finance Articles, Total Reads: 4808 , Published on 03 April 2014
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The first step in devising go-to-market strategy is to determine where in Africa the great opportunities lie. According to the secondary research on population numbers, regional growth and expenditure on food, four countries will account for maximum consumer spending in Africa by 2020. These four countries are South Africa, Nigeria, Ethiopia and Kenya. South Africa is the most developed market but it is also the most expensive and competitive market. Considering the factors such as local demand, political & economic situation and competitors, it can be seen that Nigeria provides an attractive market for food retail sector in future. Over 43% of population is 0-14 years old. Children foods and health food products have the best sales prospects. Other product type offerings which have the most sales potential are Bakery, confectionery, dairy products, frozen sea food and processed fruits and vegetables.


Nigerian consumers are price sensitive. Consumer demand for small-sized ready-to-eat food products, prepared and packaged for one-time use, is high due to their affordable sizes. They prefer consumable food products processed and packaged for long shelf life without refrigeration. Follow selectively integrated business model. Evaluate the cost of production of an item in Nigeria and decide whether to produce or import based on comparative cost advantage. Nigeria is by far the leading producer of most agricultural commodities in Africa including rice, wheat, soybean and maize. But the production volumes are far lower than the demand with most of producers operating under 40% capacity. To meet the excess demand, companies import from other countries leading to an increased price level of food products. Companies must embark upon a backward integration strategy to assist smallholder to supply better quality and consistent volumes of raw materials. Challenges related to importing raw materials can be addressed through this strategy and is cost effective too. Companies must choose sourcing partners that have strong links with the community and a high level of intelligence on local preferences and challenges. Distribution model is the best model for market entry. The key here is to choose the right partner. The distributor should have adequate storage capacity and a strong distribution network covering the whole country. Companies must build strong sales and distribution networks by leveraging a mix of third-party, wholesale, and direct-distribution models. Companies can reach lower strata of the society most effectively by employing locals to act as agents, or by partnering with local organizations that have links into the rural market.


Image Courtesy: freedigitalphotos.net, africa


Why Nigeria?

Africa with an annual GDP growth of 5% since 2000 is one of the fastest growing markets. Africa is not one country. The environment is different across different countries in Africa. The key to success for packaged food companies in Africa is the ability to focus on specific opportunities and develop differentiated, relevant offers that address substantial, unmet needs. The first step is to identify the markets with maximum potential for sales. One of the most important drivers to the increases in food consumption and imports is an increase in per capita income. South Africa is the most developed market but it is also the most expensive and competitive market. Nigeria is the largest market in Africa with a population of 177 million growing at 3% annually. An average Nigerian spends 50% of his or her earnings on food (Table 2). Rising spending power of middle class, average yearly GDP growth of 6.5%, rapid urbanization with over 40% of population living in cities will lead Nigerian consumers to purchase more goods and services and will make it easier for companies to reach consumers with its products and services . Even though there is huge potential, there are risks and challenges which need to be taken into consideration. Poor infrastructure, inadequate power supply, unstable political scenario hampers business growth in the region. But successful companies can’t depend on Africa’s infrastructure and they should develop strategies to invest in their own support systems. Companies should partner with governments and communities to establish credibility and deal with bureaucracy and corruption. ECOWAS also plans for investment in West Africa which has direct implication on the development of agro-food industry. Taking all these factors into account, risks will reduce and Nigeria will be the most attractive market in future with highest demand for food products in Africa.


Growth Approach

In order to double the turnover within a short span, companies could employ two strategies. One is scaling the existing business and this would imply a capital requirement. In a capital constrained world this option doesn’t seem the best one. Alternate approach is selective value chain expansion. Identify excess return opportunities of each product in each country. For each of the identified products, evaluating the cost of production and the comparative advantage a particular country has to produce the crop cheaper and better is a better alternative from a capital and return perspective.


Backward Integration Model

Nigeria is by far the leading producer of most agricultural commodities: 3million tons of rice, 9million tons of vegetables and 0.5 million tons of soya beans annually . Still the demand far exceeds the supply and as a result Nigeria remains a net importer of agricultural commodities. Many imports are made from Brazil whereas Madagascar, Uganda and West Africa have comparative production advantages. Food processing companies in Nigeria alone imports over $2 billion of cassava. This presents a huge investment opportunity in Cassava value chain for Agro processing companies as it eliminates 80% transport cost and reduces 60% post-harvest losses . Backward Integration model is seen as the most effective means of sourcing input materials as it ensures constant supply of raw materials for processing. The model works as the agro-processing company provides land, immediate market, input credit and technical support and extension services to the smallholder farmers. The model is cost effective; companies can receive consistent quality produce at competitive prices having minimal logistical constraints.


Product Portfolio

The demographic profile of Nigerian consumers shows that 43% of population is of 0-14 years which presents a huge opportunity for children foods and nutrition/health food products . Despite the per capita income growth in the country, over 40% of children are malnourished and 10% of women are undernourished . Agro food processing companies can see this as an opportunity and produce and promote nutritious food products as it would appeal to health conscious consumers as well. Companies should employ innovation in coming up with such products. Product portfolio could be built based on the demand for food items consumed (Table 3). The frequency of consumption of maize was consistently high as most people consume it almost every day. After maize, the most frequently consumed food was cassava, followed by rice and sorghum. Table 4 lists the products that have the best sales potential in Nigeria.


Packaging format

Nigerian consumers prefer relatively small-sized products prepared and packaged having long shelf life for affordable one-time use as most of them are price sensitive. Companies should design innovative value based packing formats like stand up capped pouch. Other important qualities to be considered for African market in packaging of food and drink are easy to open, easy to store, ability to preserve food longer and reusability.


Distribution

Most of the trade happens in traditional or informal retail market in Nigeria. Companies should develop multi-tiered models to route the products to both formal and informal markets and reach maximum number of customers. To enhance the market coverage companies could establish a network of trusted third-party distributors and wholesalers teaming their own sales force with them to ensure a measure of control. Companies must choose their distribution partners who have strong distribution network all over the country.


Last Mile

Reaching the end customers could be a daunting task with poor roads and limited infrastructure in Nigeria. Stimulating demand through traditional media viz. television and radio may not always reach all the customers. Tailored messages and offerings to specific market segment are critical to success. Companies must identify strong local agents through which they can access informal markets and gain information that they can use to offer customized messages.


Conclusion

There are some key enablers which should continue to do well in order to align the whole organization to execute this strategy. Companies must ensure excellence in execution by effectively managing complexity and scaling up IT, risk and compliance systems. Should continue to build strong M&A and enhance due diligence capabilities. Optimize capital structure and build financial flexibility to cope up with any political or economic scenarios. Finally companies must recruit and retain top talent and uphold entrepreneurial spirit.


Table1: Consumer Spending

Countries

Population
(in millions)

2010 Spend
(in billions)

2020 Estimated Spend
(in billions)

Kenya

40.00

$23.00

$37.00

Ethiopia

83.00

$20.00

$43.00

Uganda

33.00

$15.00

$30.00

Nigeria

151.00

$115.00

$167.00

Ghana

24.00

$15.00

$29.00

Senegal

13.00

$10.00

$16.00

South Africa

49.00

$215.00

$315.00

Angola

19.00

$14.00

$18.00

Zambia

13.00

$10.00

$23.00

Source: Euro Monitor Africa Consumer spending 2010


Table 2


Nigeria

South Africa


Year

Consumer Expenditure (US$ million)

Consumer Expenditure on Food (US$ million)

% of Food expenditure

Consumer Expenditure (US$ million)

Consumer Expenditure on Food (US$ million)

% of Food expenditure

2010

149,017.20

83,153.30

55.80%

219,907.00

40,323.40

18.34%

2011

144,865.60

79,018.20

54.55%

243,636.50

44,081.40

18.09%

2012

159,754.20

86,659.40

54.25%

237,038.70

42,281.50

17.84%

2013

165,359.00

89,553.40

54.16%

242,830.50

42,959.60

17.69%

2014

175,488.80

94,988.70

54.13%

251,183.30

44,036.80

17.53%


Table 3

Percent of Total food expenditures (Nigeria, 2010)

Total Food
Expenditure

Beverages, tobacco

Breads & Cereals

Meat

Fish

Dairy

Fats,oils

Fruits/Vegetables

Others

% of total Expenditure

2.73

34.08

12.88

15.22

5.61

5.15

15.44

8.89


Table 4

Product type having the most sales potential in Nigeria

Nutrition food products & Ingredients and additives for feedstuff

Fast food and other dairy products including, ice cream and yoghurt

Bakery, confectionery and food preparation ingredients & Specialized food ingredients such as additives, preservatives, and flavorings

Fruit juice concentrates

Frozen sea food and Processed fruits & vegetables


This article has been authored by HariPrasad from IIMU



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