FMCG companies find Africa enticing and with good reason: It has a young and growing population that is moving into urban areas. Further, the GDP growth is outpacing population growth resulting in a high GDP growth per capita, improving the spending power of Africans. These demographic and economic changes are causing the emergence and growth of the middle class throughout the continent, which in turn is driving demand for FMCG goods.
This is Africa
With a population of about 1 billion people spread over 30 million km2 and more than 50 countries, Africa is a diverse and fragmented market.
Despite governance improvements, Africa still faces high levels of bureaucracy and corruption in many areas. It also has a large infrastructure deficit specifically with low road / rail density making it difficult to move goods. Regular power outages place a further burden on business and distribution in the region. Most African governments have noted this and have embarked on infrastructure expansion programs.
In spite of improvements, the World Bank assessment on ease of doing business still ranks most African countries poorly. This can translate into a higher cost of doing business and a corporate reluctance to do business in Africa compared to other parts of the world.
A lack of skills and experience also exists at a mid-manager or senior manager level in many African countries, which makes developing and then executing Africa strategies more challenging for FMCG companies. With more companies entering the market the competition for talent is heating up and attracting talent has become a top consideration for FMCG companies.
The nature of retail distribution in Africa is also different as the majority of retail is made up of informal and small traders. In Nigeria for example, independent grocers make up 50% of the retail market in opposition to multinationals.
Strategies and innovation
In light of the above challenges, companies have had to adapt to the trading conditions in Africa. This has entailed companies investing in their own infrastructure such as building their own water treatment plants (Heineken) and even paving roads.
To integrate with the unique retail environment, FMCG companies have built strong relationships with the informal traders by having local sales staff on the ground to identify new outlets and to help these traders build their businesses. In so doing, they expand their coverage with minimal capital outlay. This solution has been coupled with strong incentives for these informal traders to boost sales and brand visibility.
Coca-Cola has attracted a lot of attention by employing a Micro Distribution Centre (MDC) model in which locally owned depots are set up in densely populated areas. These MDCs are then supported by the local Coca-Cola headquarters with technical expertise and operational financing. In turn, these locally owned depots then further distribute to more rural areas using smaller trucks and sometimes bicycles or push carts.
Another manner of tackling these problems is by product innovation. Promasidor replaced the animal fat in its powdered milk with vegetable fat in order to reduce reliance on refrigerated transport making it easier to distribute.
Distribution challenges are also a factor on the input side as there is often uncertainty around supply and variability in the quality of raw materials. Companies have had to focus on building strong supplier relationships or even by vertical integration in order to build a stronger supply chain.
Africa consists of unique markets that require an innovative approach to distribution to overcome challenges and reach consumers. The strong incentive of high growth for FMCG companies within these markets continues to drive these companies to find unique ways of approaching the continent.
– Jean-Pierre Olivier
Senior Analyst, RisCura Fundamentals
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