Anna Rosenberg, Head of Sub-Saharan Africa at FSG, is currently on a research trip to Kenya, Uganda and Ethiopia. Here are her latest insights:
As I sit on the plane from Addis Ababa to London, I am gathering my thoughts and impressions of Ethiopia. My trip made me realize just how complex a place it is. Ethiopia is different. Or at least, that’s what everybody keeps telling me. “The first mistake foreign businesses make, is to think that Ethiopia is part of East Africa. Ethiopians are not really Africans, nor are they Arab,” a leading distributor for the healthcare industry told me.
Ethiopians count time differently. It is currently the year 2006. Midnight is 6pm according to “Habesha time.” Unlike its neighbors, Ethiopia has long been closed to foreign exposure. It was famously never colonized, if one ignores the 5 years of Italian rule in the 1930s and 1940s – enough to introduce pasta to the national cuisine. From 1974 to 1991, Ethiopia was under communist influence. Today, Ethiopia is only at the very beginning of opening up to the world.
Yes, Addis Ababa has been the capital of international diplomacy in Africa since the early 1960s. Home to the African Union headquarters and other international organizations, Addis also hosts diplomats from around the world in its swanky hotels and remarkable Chinese-built AU building. Diplomats are easily spotted – they drive big cars and wear expensive suits.
The two sides of Addis include swanky buildings and impoverished areas
It seems odd. The majority of the population earns about US$60 per month and cars have a 240% import duty. The result is a stark contrast between rich and poor, diplomat and local. Most shops sell cheap Chinese imports or second-hand clothing. As a result, you can find the odd Ethiopian walking around in a Marks and Spencer shop assistant jacket. Russian Ladas from the socialist area, today widely used as taxis, contrast with the diplomat’s 4x4s. The high import duty means that cars, no matter how old, appreciate in price!
The real economy can be seen in the city’s vast market place Merkato, but Westerners rarely come here
The shop-owners in the Merkato are collectively investing in real estate to move their shops from their little shacks into proper buildings
However, not all Ethiopians have low income levels. The number of dollar millionaires rose from 1,300 in 2007 to 2,700 people last year. GDP grew by 7.1% in 2013 and the government is implementing reforms to improve the operating environment. Ethiopia is therefore increasingly attractive for multinationals that want to tap into a large population estimated at around 90 million people.
This population figure is nonetheless misleading. Local distributors in the FMCG keep telling me that, “the addressable market is more like 10 million when you count the people living in cities.” Some argue that the addressable market is even smaller. Contrary to other African countries, urbanization is not very pronounced in Ethiopia as about 85% of its citizens live in rural areas. Despite low urbanization, consumer goods companies present in the market are experiencing dramatic growth rates of between 20% to 50%. It seems that growth, while from a low base, is happening fast.
I have come to see that doing business in Ethiopia is a long-term game. Companies must understand it will take time for income levels, and consequently consumption, to grow. It will take time for the government to build the required infrastructure to connect rural to urban areas, so that the addressable market will approach 90 and not 10 million people.
The government’s main objective is to transform Ethiopia first and foremost into an export market before it becomes a consumer market. Industrialization, job creation and poverty reduction are also major priorities – and indeed, it has already made major strides in reducing poverty. The government also wants to tackle the recurrent problem of Forex shortages, which is only possible by having more US dollars come in through exports rather than by importing more. For example, the high import duty on cars has been implemented because the country spends a large amount of its export earnings on importing fuel. The government wants to change this trend.
According to many local and international business leaders, the government differs from other African governments in that it delivers on many of its promises. It has created various industrial zones, given preferential treatment to investors keen on producing locally, such access to land and tax exemptions. The amount of infrastructure being built across the country is nothing less than remarkable.
The railway currently under construction in Addis will provide a much-needed improvement to public transport
This image vividly represents Ethiopia’s ongoing transformation
The government also wants to keep a tight grip on the economy. It will only allow foreign companies to invest in sectors that have a true need. As the minister of Foreign Affairs Tedros Adhanom Ghebreyesus told me, “Multinationals need to bring something we don’t already have, either technology or innovation.”
As a result, some sectors are still closed to international companies. These include retail, telecommunications and banking, among others. The government wants to protect local industries and strengthen them before international players come in. There is nonetheless mounting pressure for these sectors to open up and as many say, it is only a matter of time.
The Commercial Bank of Ethiopia is one of the few banks allowed to operate in the country
Some companies are in fact already sneaking in through the back door. Leading international telecommunication providers are allegedly acquiring stakes in Belcash and M-Birr, two companies that provide the technology infrastructure for mobile banking. Telecom giants are therefore already positioning themselves for preferential access to the market.
Ethiopians want international brands, and they want them now. The odd coffee shop uses a similar logo to Starbucks, and I saw several shoe shops that call themselves Aldo and Clarks. “But Ethiopia was long closed to foreign influence, and they don’t have a direct association with international brands. So, a no-name brand from Turkey for example, can become very successful here, because consumers don’t know the multinational brand. Companies are on a level playing field, and it all comes down to marketing,” a distributor whose Turkish nappies enjoyed a much larger market share than P&G’s pampers, told me.
International brands are much aspired to, as can be seen from this Apple logo on a bus
Local brands are widely popular, and for a good reason. I quite enjoyed St. George’s beer
Understanding the “local code” is crucial when trying to reach the consumer, as I have been told repeatedly. To give you an example, an international FMCG company endorsed a local musician. However, it turns out this local musician was not well-liked by the 30 million strong Oromo tribe because of his praise of a former Emperor who committed manslaughter of the Oromo many decades ago. The company had planned to send this musician on a tour into the Omoro tribal area, which caused a massive outcry. The marketing mishap reveals how companies must understand cultural sensitivities to succeed in Ethiopia.
Several international companies are already tapping into Ethiopia’s opportunity very successfully. They include the typical pioneers for doing business in Africa; namely Coca-Cola, Pepsi, Diageo and Heineken. GE already paid various visits to the country and is planning to set up an assembly factory. Coca-Cola has a long history of being in the country. Apparently Emperor Haile Selassie owned shares in the company – and at a time, Coca Cola was traded for gold!
The pioneers are already here. Their success partly rides of the back of what the head of GE for East Africa described: “in Africa, we are working backwards, we create the infrastructure that will lead to the demand for our products.”
The pioneers of FMCG companies are already present in the market: Heineken, Pepsi and Diageo
I can see that this approach takes time and is expensive, but ultimately, the “working backwards approach” leads to success not just for the companies, but for the socio-economic development of countries.
Given the realities I have seen in Ethiopia, this model makes perfect sense to me.
For additional insight from Anna’s research trip in East Africa, be sure to read her earlier posts: Kenya – A Regional Trendsetter, Notes from the Field: Kenya, Nairobi – African Cities Need Urban Planning, Kenya – Let the pictures speak for themselves, and The Uganda Trap.