For most of the past decade, markets in the Middle East, and especially the GCC, were perceived as attractive profit drivers for many Western multinationals, while markets in Sub-Saharan Africa promised strong growth potential. However, today the region is exposed to new and long-lasting challenges.
As a result, Middle East and Africa (MEA) executives at large multinational firms find it increasingly difficult to secure resources from headquarters. This is because global corporations now have to face decisions like whether to put new resources into a developed market like the US, which is saturated, but growing at about 2.0% and has a population of 320 million versus a market like Saudi Arabia, which is growing at 0.9% and has a population of 30 million.
To discuss the economic outlook and strategies MEA executives can implement to improve performance despite more challenging market conditions, FSG hosted an executive breakfast in Dubai which brought together twenty MEA decision makers. Reinforcing some of our findings as highlighted by the HBR recently, here are the key takeaways of the discussion:
Slow global growth is transforming the MEA region
Overall, at about 3.1% GDP growth forecast for 2017, the MEA region will grow well below its historic average growth rate of around 4.5% annually over the last decade. Low commodity prices are a major driver for this. Oil prices have been low since mid-2014, but they are expected to remain depressed (at about 54-56 USD per barrel) for the next several years. This is bad news for the MEA region’s largest-spending markets such as Nigeria, Saudi Arabia, UAE, Qatar, Algeria, and Angola as current price levels and oil price dynamics will not see a return of the spending patterns we saw in the boom years.
Lower revenues from oil are further weakened by depreciating currencies in Africa and rising interest rates in the GCC in response to a strengthening US dollar. Regulatory changes (such as in the GCC and Iran) and socio-political risks (such as in Egypt, Algeria, Cameroon, Angola and Kenya) further depress an already sober economic outlook.
The business environment is changing fundamentally
In response to tougher economic conditions, governments are stepping up protectionist policies to increase revenue streams and ensure their countries benefit from business being conducted locally. However, this uptick in protectionism and fiscal reforms are increasing operating costs. Protectionism has always been part of doing business in most emerging economies, but whereas previously governments were encouraging investors to create local structures that would benefit the country, for example by providing cheap land, now they are emphasizing a more punitive approach as they seek more immediate results. Localization pressures, tariffs, taxes and other business costs are rising across the region as a result.
To generate new revenue streams, governments are increasing or introducing VATs (for example in Egypt and the GCC), corporate taxes, and considering electricity and water price hikes while food and fuel subsidies are being removed.
Customer behavior is transforming for good
More difficult economic conditions and a costlier operating environment are reshaping customer behavior. Consumers in a number of markets are suffering from rising inflation, tax increases, higher utility costs, and currency depreciation, reducing their purchasing power. In SSA, these dynamics coexist with the emergence of new customer segments driven by socio-economic development, creating opportunities for firms that are in a position to tap into them.
Governments in a number of MEA markets are becoming much more price sensitive as they rationalize expenditures, cut budgets, and demand more value for money. In addition to lower (and changing) demand, businesses are also facing rising costs, liquidity constraints, and policy uncertainty.
The key challenge with these dynamics is that they are here to stay and short-term solutions that may have worked in past crises will not address the pressures business models come under if these conditions persist for several years in a row.
When polled, 28 % of executives in the room observed that over the past year, customers had become more price sensitive, and another 28% perceived that customers were demanding more value for money. A further 17% observed that customers were spending less overall. Most stressed that this environment had put their profitability under pressure and many were seeing non-payments or payment delays.
The changes in the environment are severely affecting business operations
As a result, MNCs need to revisit their MEA strategies
Executives are placing great emphasis on product innovation to capture customer demand in this environment, and to compete with lower-cost alternatives. Bringing new, cutting-edge products into the market is popular for consumer goods-oriented companies that are keen to attract trend-conscious consumers. B2B businesses focus on emphasizing technology innovation that supports operating efficiency and brings down business costs to generate demand.
But as customer behavior is changing, executives also acknowledge that their sales teams’ skills need to evolve with it. The group in the room emphasized that sales skills in their teams, and also at their distribution partners, were not keeping up with changes in the environment. Most emphasized the need to implement training for their sales teams with a particular focus on capabilities in identifying and targeting untapped customer segments and the ability to detect and analyze customer insights. Additionally, the group discussed the importance of aligning expectations and incentives to capability building.
From a planning perspective, executives at the breakfast were surprised about the longevity of this depressed economic outlook, and discussed the importance of setting more conservative targets. Finally, companies also acknowledged the need of not merely responding to changes, but getting ahead of them, in particular by using scenario planning as a way of dealing with highly uncertain market outlooks.
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