With an increasingly vibrant consumer culture, a surging workforce and advancements in infrastructure, Africa promises multinationals an abundance of opportunities.
In the past, embracing the rich and varied markets, with their individual differences, idiosyncrasies, customs and cultures, has proven to be a tricky operation for many ambitious businesses. Some have gained a foothold in the regions, others have receded, along with their profits. So, for companies looking to engage with Africa, what are the challenges and how can they be overcome?
The draw for multinationals to tap into the African market is compelling with such potential for growth. In 2020 six out of the top ten fastest-growing economies are in Africa. Africa’s labour force will grow exponentially as the continent’s population is set to quadruple from 1.19 billion in 2015 to 4.39 billion in 2100.
In the supply chain industry, planners discuss Volatility, Uncertainty, Complexity and Ambiguity or VUCA, for short. Global markets, from North America to Europe, Australia to Asia, carry their own individual brand of VUCA – in Africa, the same is the case. The multinational has to realise the different markets and culture of individual markets – what worked in Canada may not work in Chad, what worked in the Netherlands may not work in Nigeria.
Vendors, Logistics and Due Diligence
In order to understand the varied African markets, employing a vendor is a good first step. This allows the multinational to piggyback on the knowledge of a company that has experience in the region. Before entering into a partnership with a vendor, companies must ask the important questions:
● What is the scale of their distribution?
● What are their market capabilities?
● What infrastructure currently exists?
The alternative is to set up a full-service operator which takes on the bulk of the business: buying, selling, assortment, storing, transporting and financing. If you choose this option, prior assessment and proper due diligence have to be practised – examine the financials, the scale of the distributor, their go-to-market capabilities, the infrastructures they own or lease and their organization capabilities. Entering into the African market can be disastrous as it is a cost-heavy endeavour and it must be done right.
Multinationals that plan to import require an in-depth understanding of any potential bureaucratic obstacles and go-to-market processes: trading blocks, transportation, necessary documentation, custom requirements and registration measures. These vary on the country and market and a key learning is to understand the individual market authorities’ rules and regulations.
The streets and the marketplaces of Africa are sites of the bustling business and flowing merchant activity. Infrastructure is what can elevate this activity from informal to formal commerce, allowing African small business owners to extend their commercial exploits beyond the parochial. For large scale multinationals, this lack of infrastructure and resulting disruptions mean supply chains must be resilient on the continent.
Progress is being made in infrastructure: “Kenya Railways Corporation is developing a new standard gauge railway line for passengers and cargo transportation between Mombasa, the largest port in East Africa, and Nairobi, the capital city of Kenya.” The infrastructure to transport containers from Mombasa to Nairobi did not exist at the time I was managing the cluster. It was operational but had limited capacity and it was plagued by delays from the arrival at the port to the delivery of the containers to the destination. This current project enables more stability in obtaining your containers from the largest port in Kenya while at the same time potentially reducing the cost of moving the product and having a significant impact on carbon emissions.
South African financial group Rand Merchant Bank published their 9th edition of their report in 2020. The report focuses on the most attractive countries for investment and Kenya is listed on the list of cost-efficient countries. Various reasons changed Kenya’s attractiveness: favourable weather conditions, a more pacified political landscape, urbanisation, integration into the East African Community and development of infrastructure including oil pipelines, railways, ports, roads and factories. A sign of the potential and what is coming for the markets on the continent.
Delivering on Expectation
Instead of owning a fleet, companies tend to use an established transport vendor that is a multi-user, multi-site and multi-company facility. Truck turnaround, the time on outbound and inbound logistics is not comparable between Africa and the rest of the world. In Europe, you would find that most companies transporting FMCG would have a truck turnaround of about 30 minutes.
The truck turnaround time concept did not exist in Africa as traffic and infrastructure conditions and receiving site conditions were not consistent. The impact on the bottom line is that you were not utilizing the assets more than once per day hence adding incremental cost to the business as a manufacturer, thereby delaying your ability to react to the consumer’s needs. International logistics vendors like DHL, Imperial and DSV operate in Africa but the cost is significantly higher than a local full-service distributor. Long dwell times of products in West African ports led to longer truck turnaround times, warehouses lacked ease of access and there were only smaller truck types, together these all formed the domino effect that consistently saw supply stuttering and demand plummeting.
Investment from Overseas
The African Development bank (ADB) estimates that the continent would need $90-$130bn of investment per annum in order to develop the appropriate infrastructure for modern supply chain structures. A fitting comparison is China at the dawn of the 1980s. Prior to opening up, customs held back the import of goods and trade constantly faltered and stumbled. The foundations for trade were lacking, the economy was in stasis and overall, it was a backwards market. However, once the isolated country opened its doors to international business, investment arrived, transport networks improved and thus, trade got incrementally more possible. Africa is now seeing foreign investment from multinationals from nations such as China, South Korea, India, Singapore, Iran and Russian and they are providing the funds and means to stimulate African business. Africa, as China did before, can most certainly witness the same level of growth.
The impact of Chinese investments is evident on the infrastructure around Mombasa road, one of the most popular thoroughfares in Kenya. These investments have led to new highways around this road, significantly improving one’s ability to move around Nairobi. The Standard Gauge Railway linking Nairobi and Mombasa was funded largely by the China Road and Bridge Corporation and other Chinese construction companies are getting involved in Nairobi’s real estate boom, realising and relishing the opportunity.
E-Commerce in Africa
Full-service distribution is expected to be the trend for some time as the reality is that the cost-to-serve for a multinational is too high. This type of full-service distributor model will be in place for some time until the required infrastructure is present. The only disruptor to this would be e-commerce, the likes of Amazon coming into Africa establishing their own network and infrastructure which FMCG companies could utilize. If e-commerce committed to the continent, the construction of infrastructure would be greatly accelerated.
Africa’s largest e-commerce business, Jumia, launched in 2012 and the company deduced that logistics is the greatest challenge for growth in the e-commerce market in Africa. The company invested in its own fleet and across the twelve countries it operates in, they have a larger fleet than DHL. An injection of investment from e-commerce would dramatically change the supply chain landscape in Africa. Once the foundations are cemented down, multinationals will have the platform to push forward into new and exciting markets.
Consumer Loyalty and Value Proposition
Customer satisfaction, product innovation and value proposition all move in tandem when reviewing the consumers we serve. There have been many multinationals that have established strong brand equity and have won the hearts of the consumers yet the minute there is an entry of a cheaper alternative that demonstrates parity performance and offers equal value this is where many multinationals stumble as it takes them far too long to react to this threat.
When met with disruption from competition, loyalty can be maintained by selling an innovation in your product and P&G does this well. For example, the value proposition provided by having a diaper that offers 8 hours of uninterrupted sleep for a household has immeasurable benefits. However, at some point, in this equation these value benefits become too expensive, and consumers will switch if they have identified a new offering that offers similar benefit at a lower cost.
As the markets seesaw and consumers weigh up their options, your company has to know where the tipping point of consumer loyalty lies. This means you may have to continually adjust your product offering, adding or taking away an innovation, more embellishment or less to be relevant to catch the attention of the savvy consumer.
Sustainability and the Green Economy
The question of sustainability is a major concern in society and business. However, as economies are in different stages of their development, carbon emissions are not high on the African agenda. If consumers don’t have the opportunity to separate garbage or recycle properly, sustainability will not become part of their day-to-day worries. The admits that the African continent is yet to embark on a sustainable mission as poverty levels remain high. The UNDP aims to ensure growth that can diversify economies, remove inequalities and ultimately, fight back against environmental degradation. The establishment of green economies in Africa will create jobs and use their copious renewable energy sources. This is an opportunity for multinationals to embrace the green economy when entering into African markets, ticking the boxes of sustainability and growth – two focal points to any modern business.
Profitability and Volatility, Variation and Fluctuation
When companies enter Africa, they see the opportunity and go with aggressive topline targets: high double digits and continuous growth over a period of three to five years. If your business model, product or your cost structure is not adapting quicker than increasing, then you may find yourself leaking money. Profitability is the great arbiter. When a business starts to be unprofitable, most multinationals will decide whether it makes sense to stay or not. And usually, the biggest way to reduce costs is to either take out the people, disband operations completely or move to a full-service distributor model.
Many companies that enter Africa continually scale down until they withdraw completely after a period of time. Trends are harder to predict; African markets differ due to their political, geopolitical and economic volatility. Dollar or Euro-based companies have to deal with fluctuations and recalculations of currencies when importing and exporting. Despite seeing the opportunity to grow, you may have to choose to price up, lose volume, lose the market share just to become structurally sound.
Talent management and recruitment is a difficult process, but it is critical in ensuring multinationals succeed. A clear talent recruitment strategy needs to be defined at the onset of establishing roots in a market.
The first priority for the business is to identify key universities from which you will hire your talent.
The second element is to identify what value you can bring to the universities by engaging with the various department heads as a multinational or a local business, for example, career days, mentoring, coaching networks or even supporting case studies for the universities. These methods of grass-level recruitment should be considered as you look to build your company’s presence on campuses.
Thirdly, reach out and utilize current staff that are alumni of African universities and have them lead campus recruitments as they are your greatest ambassadors.
Fourth, make sure to have a defined plan of engagement with the university to ensure you are attracting the top talent. Following these four steps will enable you to build a successful, knowledgeable and young team that knows the market, culture and customs.
Understand the Consumer
Succeeding in Africa is dictated by companies’ willingness to understand their consumers’ needs. Companies, depending on the market, will work from their needs backwards on their products. Product innovation and development in Europe will have to be different to other markets like Africa. Companies should learn from their consumers in order to develop an appropriate product portfolio that will be popular in individual markets.
Work backwards from the consumers and do not generalize. For example, the formula needed to wash clothes in Kenya could be different to those consumers in South Africa, as the mineral content of water differs hence design the product offering to meet the insights shared by the consumer. This is an example of the seesawing required to provide the vital ingredient that an individual consumer market requires.
Going forward and beyond Covid
Going forward, in order to tap into the African market, companies must take these three initial steps:
- Offer a clear portfolio that delivers on consumers’ unmet needs. The elements that must be evaluated are price, packaging and innovation level.
- Instill a clear go-to-market strategy that details how you will set up the organization, merchandising and distribution.
- Present a clearly defined end-to-end supply chain program that will support the go-to-market. This program must cover all elements of the supply chain from sourcing, packing, making, planning and distribution.
Adhering to these first steps will create strong pillars for multinationals entering the African market. Due diligence, respect for cultural difference and a complete understanding of the market landscape will ensure success for your company. The Covid-19 crisis has accelerated digitization, cross-border cooperation, regional interaction and market consolidation in Africa. The pandemic has been a catalyst for new opportunities: boosting local manufacturing, formalizing small businesses, and constructing urban infrastructure.
This could be the impetus to speed up Africa’s supply chain transformation. Greater focus could be placed on serving the needs of vulnerable urban populations, developing African healthcare systems to build resilience and bring forward a more equitable society. The OECD is working on a program with the West and Sahel Club Secretariat to utilize ’ data and evidence to support cities and governments in making urban areas more inclusive, productive and sustainable. Such benefits that have the potential to lay groundwork for smoother trade in the future of the increasingly urban and developing continent.
As the African proverb states, “only a fool tests the depth of a river with both feet”. The main takings in the most simple terms: understand your consumer and do the due diligence.
Don’t get caught out of your depth.
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About Harshal Harkison
Harshal Harkison is a Sub Saharan Supply Chain Director at L'Oréal. He has over 18,5 years of experience in the supply chain field. Harshal best describes himself as a business leader with a clear vision, passion for winning, and discipline while developing an extraordinary organization.
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