Kenya – A Regional Trendsetter

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:

My conversations today with business leaders, consultants and journalists revealed that Kenya is a regional trendsetter for many reasons. The country’s private sector is arguably the most dynamic in the region, benefiting from a free market economy since independence. Kenya is much more open to international business as a result, unlike neighbors such as Tanzania that, for a long time, follow a state-led and socialist approach to business.

Kenya is oftentimes the first point of entry for goods traded in the region through its port of Mombasa. Upon clearance from the Mombasa port, goods are then transported via the Northern Corridor to Uganda, Burundi and Rwanda; and from those countries to South Sudan, and the Eastern DRC. The majority of goods not imported from outside the continent and sold across East Africa are produced in Kenya. Its manufacturing sector is underdeveloped but remains bigger than those of other markets. As a result, Kenyan consumer trends, particularly in fashion and technology, are carried throughout the region.

Historical legacy and better infrastructure are not the only reasons for Kenya’s role as regional trendsetter. Kenya’s financial landscape is more sophisticated and mature than its neighbors’ and Kenyan banks are expanding across the region.  Local retailers, such as Nakumatt, are among the most successful in the region and are on an expansion drive. The country’s talent pool and human capital are strong, as multinationals face minimal problems in staffing their local operations.

Anna Rosenberg visited the headoffice of Nakumatt - a leading retailer in East Africa

Anna Rosenberg visited the headoffice of Nakumatt, a leading retailer in East Africa
 

However, not all East African consumers are receptive to these trends. Tanzania’s relationship with Kenya is strained. Tanzanians perceive Kenyans as aggressive and are afraid that they might take over Tanzanian businesses if the country opens up more under the East African Community. As a result, Tanzania is hindering faster progress of regional economic integration.

To put it in the words of two executives I spoke to today, “Kenyans are trendsetters in East Africa” but “they are not well liked in the region.”

Notes from the Field: Kenya

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:

Nairobi, Kenya -Anna Rosenberg

Kenya – Security is a Concern
Kenya is an attractive place to do business – that’s the reason I am on the ground doing research. My conversations today with business leaders and ordinary Kenyans alike surprised me in the palpable, growing sense of insecurity they implied. Perhaps our talks were overshadowed by a recent Islamist terrorist attack that had young men storm a church in Likoni, near Mombasa, to open indiscriminate fire, killing six people.

Taking place six months after the Westgate Mall attacks in Nairobi that killed 64 people, the Likoni assault is only a reminder of the underlying tensions within Kenyan society. These tensions do not originate in religious divisions, but economic ones. While Nairobi is bustling with economic activity, the coastal areas are not. Youth unemployment among educated Kenyans is high, which fuels resentment and provides a fertile recruitment ground for radical causes.

Westgate Mall Closed

Nairobi’s shopping mall, Westgate, is closed for reconstruction after a terrorist attack in September 2013

How is this fear impacting business?
I spoke today to the regional head of a company that sells spirits across East Africa. Although his business in Kenya is still growing, he stressed that it is performing worse than other East African markets as consumption activity is shifting to the home, away from public places. Consumers are also buying less alcohol because of negative religious connotations. His employees are scared, particularly when launching marketing events in Nairobi’s flashy Westernized hotels – a prime target for terrorists.

A seasoned Kenyan investor told me that his friends in the tourism industry near Mombasa are severely feeling the economic impact of insecurity. Every incident triggers a drop in prices for hotel rooms, causing dramatic losses in revenues, in turn leading to layoffs that contribute to unemployment. A vicious cycle.

To be clear, as I have heard and seen repeatedly today, Kenya’s business landscape is one of dynamic and fast-paced growth. Business targets typically exceed expectations. Investments in the power sector and nascent oil & gas industry keep rising. Yet for Kenya to remain an attractive hub for multinationals in the region, the government needs to ensure that economic growth creates attractive employment opportunities for the disgruntled youth.

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Businesses Need to Prepare for a Tough Year in Nigeria

Despite a positive medium-term economic outlook, Nigeria is struggling with various challenges that undermine its economic potential: These challenges are coming to the forefront as the country prepares for presidential and national assembly elections on February 14, 2015. Executives should expect political volatility to hinder policy-making, fuel inflation, and currency depreciation. Business customers, partners, and government agencies will be in a wait-and-see mode up to elections. This could have implications for demand, investment plans, and the speed of moving through regulatory processes.

Power struggles ahead of the 2015 elections hinder the passage of important legislation and weaken investor confidence: Political infighting is undermining the current administration’s ability to pass policies. After various high-profile defections from the ruling People’s Democratic Party (PDP) to the newly formed All Progressive Congress (APC), the APC now forms a strong opposition. It is blocking all legislations including the 2014/2015 budget. President Goodluck Jonathan’s politically motivated decision to oust widely respected Central Bank Governor Lamido Sanusi weakened investor confidence significantly. In past months, the president also fired various ministers, including the ministers for information, environment, and foreign affairs. 

Inflation is expected to rise, and the naira is expected to depreciate in 2014. Both trends will put downward pressure on consumer and business demand: Inflation will likely rise to double digits because wealthy individuals are flooding the economy with cash to back candidates and the government is increasing spending. In past elections, an influx of cash into the economy led to currency depreciation and inflationary pressure. Capital outflows as a result of the US Federal Reserve’s quantitative easing program, losses in government revenue because of oil theft and corruption, uncertainty over monetary policy, and weakening investor confidence have led the naira to depreciate. The power sector is undergoing major reforms that also increase prices. Electricity is now more expensive as the state-owned power company privatizes its distribution operations and hikes prices. Moreover, the worsening security situation in parts of the country is leading to higher distribution costs of consumer goods. Businesses producing locally will pass on rising production costs to consumers, who will, in turn, prioritize non-discretionary purchases.

The security situation is worsening ahead of the elections: Nigeria’s security challenges include bombings by Boko Haram and ethno-religious clashes in the northern and central areas, oil theft and piracy in the Niger Delta, and kidnappings in the Southeast. Election-related violence has hit Rivers State as skirmishes erupted between APC’s Governor Rotimi Amaechi’s supporters and his opponents. Boko Haram’s attacks have increased in recent months despite heightened military response.

Unemployment, poverty and corruption remain high and are the real drivers of criminal activity: Although Nigeria’s economy expanded an average of 7.2% per year between 2004 and 2010, the proportion of Nigerians living in poverty is still 62.6%, down only slightly from 64.2% in 2004. Social inequality and theft by powerful elites aggravate the dissatisfaction of ordinary Nigerians, who are then easily drawn into criminal activities because of lack of perspective. Oil theft by criminal gangs costs Nigeria US$ 8 billion per year. Corruption within the state oil company led to the loss of between US$ 10 to 50 billion of oil revenue from January 2012 to July 2013.

Companies should monitor developments closely to get ahead of risks and opportunities: Executives should monitor the pre-election period closely and manage corporate expectations regarding demand. Less risk-averse executives should consider strategic investments now as their competitors are in a wait-and-see mode. Details for what to monitor and which strategies to implement to protect and grow your business despite the worsening environment can be found in our latest report ‘Market Spotlight: Nigeria’.

Despite the tough environment this year, Nigeria’s solid growth will prevail: Nigeria’s medium-term macroeconomic outlook remains positive because of rising private consumption by the country’s 170-million-strong population, the economy’s diversification away from oil, and its attractiveness for investors. The GDP rebasement will also have a positive economic impact. A significant boost to total GDP figures will make Nigeria more attractive in every financial and economic model worldwide, luring more companies to invest locally.

Letters from Africa: “Angola is a sea of opportunities but an ocean of difficulties”

I have already discovered this on my first day of touching ground in Luanda. Even though I knew Angola’s capital is famously the most expensive city in the world, prices are even beyond one’s wildest imagination. A pretty average hotel room that already costs 450 USD a night when I booked it three weeks ago has just been increased to 490 USD. A small bottle of water costs 7 USD and pasta with tomato sauce 50 USD.

Cultural notions of time and reliability are different and as a result it is a challenge to schedule meetings. Calls are by far the preferred method of communication as people like the human interaction. On the upside, time is fluid and people are generally flexible. If they are late, they smile – no need for an excuse. But overall, this attitude makes it a challenge to commit to a time and date though, let alone keep a tight schedule.

But the Western business traveler (myself included) needs patience. After all, the country only emerged from a traumatic civil war a decade ago. Today, this is most obvious in the labor force where an entire generation did not receive the most basic schooling. This of course, presents various obstacles in everyday life.

 

Luanda, formerly named São Paulo da Assunção de Loanda, is the capital and largest city of Angola

Luanda’s skyline has changed dramatically in the last ten years

But Angola’s pace of change is nothing less than remarkable. The city is bustling with commercial activity. Everywhere you look there are huge construction sites and office towers are rising into the sky.  Local bank branches are on every other corner.  The roads are packed at most times of day with a considerable amount of expensive cars. There are business people of all colors and races, with a definitive majority of Portuguese, Brazilian and Chinese. People are very friendly and approachable. They like to enjoy life, to celebrate. And so I was warned before coming to Luanda that I would get little sleep because at nighttime, “that’s when the real business deals are struck.”

Letters from Africa: Doing Business On-the-Ground Part II

Currently on a research trip to South Africa and Angola meeting FSG clients and other international and local companies, I wanted to take a moment to share my latest insights (you can read Part I here):

Competition

After having spoken to various businesses in the last three days, a common theme I am hearing from the ground revolves around competition. While there is much talk in the media about competition coming from other emerging market companies, notably Chinese, Indian and Brazilian, the issue in Sub-Saharan Africa seems far more nuanced than that. While we are producing a major research piece on the topic in due course, here are a couple of initial observations:

  • Competition from other emerging market companies: This seems to be particularly relevant in the technology sector where Asian companies such as Lenovo and Samsung are rapidly gaining ground. In the consumer goods sector, competition from other emerging market companies is less pronounced with the exception of Brazilian products coming into Angola and Mozambique, as well as South African FMCG companies spreading across the continent. For companies selling high-value products in the industrial sectors (for example machinery and trucks) competition from other emerging market companies seems less dangerous. That’s because overall, African consumers seem to be willing to spend more money for products perceived to be of better quality and having a longer lifespan alongside an adequate servicing infrastructure.
  • Competition from other MNCs: By far the biggest threat comes from the same competitors companies face in developed markets. As the continent is becoming a more prominent business destination – approximately US$50 billion of FDI will flow into the region in 2013, which is more than 350% higher than a decade ago – more MNCs are moving in and competition is  increasing. Now is the time to set up a local presence, gain rapid market share and a competitive advantage.
  • Competition from counterfeit products: An often underestimated competitive threat comes from counterfeit products or trademark infringements. This impacts all sectors. While counterfeit products have undermined profits for many companies, it also has serious reputational implications if the counterfeit product breaks or even becomes a health hazard. This is a particular challenge in the healthcare sector.
  • Competition from the grey market: A major threat for exporters comes from the grey market. As unauthorized distributors bring in products from neighboring markets to sell them at a cheaper price than the authorized distributor, the established distribution partnership suffers and profit margins erode.

Stay tuned for more valuable insights as I meet more companies on the ground…

 

Letters from Africa: Doing Business On-the-Ground

Currently on a research trip to South Africa and Angola meeting FSG clients and other international and local companies, I wanted to take a moment to share my latest insights:

Today I spoke to a seasoned and very impressive South African executive running a 22.7 billion rand turnover FMCG company out of Johannesburg. He wants to remain anonymous but here is his advice to MNCs entering Sub-Saharan Africa:

  1. Build strong partnerships: Value business relationships and continuously invest in them. Personal relationships are a key component of business success in the region.
  2. Blend corporate culture with an entrepreneurial spirit: “Seize opportunity, if it presents itself. Even if the opportunity lies outside of a company’s core business competencies.” For example, acquiring a local business in a different space will enable a company to better understand the market to then move in with the core business at a later stage.
  3. Believe in the long-term opportunity: The opportunity in individual African markets might seem quite small but, “the size of the prize might be big over a longer period of time. If you are not in the game now, it will only get more difficult.”
  4. Find the right people to run your local operations: Make sure your managers fit in from a cultural perspective, and most crucially, make sure they and their families want to be in the market, “if the wife is not happy, it does not work.”

This last point was echoed by another executive from a leading South African industrial company who shared with me this Roman analogy which reflects his company’s talent strategy:

When in Rome…

One reason why the Roman Empire grew so large and survived so long – a prodigious feat of management – is that there was no railway, car, airplane, radio, paper or telephone. Above all, no telephone. And therefore you could not maintain any illusion of direct control over a general or provincial governor. You could not feel at the back of your mind that you could ring him up, or that he could ring you, if a situation cropped up which was too much for him, or that he could fly over and sort things out if they started to get in a mess.

You appointed him, you watched his chariot and baggage train disappear over the hill in a cloud of dust and that was that. There was, therefore no question of appointing a man who was not fully trained, or not quite up to the job; you knew that everything depended upon him being the best man for the job before he set off.

And so you took great care in selecting him; but more than that you made sure that he knew all about Roman government and the Roman army before he went out.

Stay tuned for more valuable insights as I meet more companies on the ground…

 

Adapt to Nigeria’s Changing Business Environment

Nigeria is changing rapidly. The size of the economy may expand 40-60% overnight, new online sales channels are booming, and the security situation is deteriorating:

  • Rebased GDP figures, to be released later this year, are likely to make Nigeria the largest economy in Sub-Saharan Africa, surpassing South Africa. While the increased size of the economy makes the country more attractive on paper, performance targets may become harder to reach as growth rates slow because the economy is expanding from a larger base
  • Ecommerce is booming on the back of Nigeria’s large consumer base increasingly shopping online. MNCs should tap into this fast growing channel to reach consumers
  • A new militant Islamist group emerged in the North of Nigeria, changing the security situation for MNCs, as foreigners are now being targeted. Companies operating in the North have to implement strategies to mitigate risks. Companies operating in Lagos and the South are not in danger from this group

Trend #1: GDP Rebase to Impact MNCs Performance Targets

Nigeria will surpass South Africa as the continent’s largest economy when GDP is revised upwards between 40-60% in October 2013. If GDP increases by 40%, Nigeria’s economy would swell from US$275bn to US$385bn. South Africa’s economic output is US$378.9bn. New GDP figures will be calculated by using prices of goods and services from a 2008 base year. Currently, Nigeria’s GDP is calculated by using 1990 figures, which do not account for the rapid development of the services, telecoms, and entertainment industries. While the increased size of the economy makes the country more attractive on paper, performance targets may become harder to reach if they are calculated on a GDP multiplier basis. Executives must communicate changes in GDP forecasts to corporate to set expectations about performance in the Nigerian market. Companies should consider revising growth targets down to reflect revised GDP growth rates. Targets should be revised down using a new GDP growth multiplier, but not in real dollar terms.

Trend #2: Ecommerce Is Growing – Get Ahead of the Curve

Nigeria’s Ecommerce market is expanding rapidly: Online sales grew 25% in 2011 to N62.4bn, up an additional N12.5bn from N49.9bn in 2010. Total investment in the sector is estimated at N2.4bn, but this figure is expected to double by 2014 as Nigerian consumers shop more online. The trend is fueled by deepening internet penetration and an uptick in purchases made with mobile phones. In Mastercard’s 2012 online shopping behavior survey, the share of purchases made with mobile phones increased to 30.3% up from 8.0% in 2011.

Ecommerce allows companies to reach a wide consumer base, even without having a local presence in the market. It also makes buying global brands more accessible for consumers in tier 1 but also in lower tier cities.

MNCs can capitalize on growing online sales by partnering with local Ecommerce providers and by offering internet shoppers exclusive deals and differentiated products.

What you need to know when building an Ecommerce platform for Nigeria

  • Payment methods and cash-on-delivery: Despite attempts to reduce Nigeria’s reliance on cash, the economy is still very much cash-based as credit card penetration remains limited. Allow customers to pay cash on delivery alongside other payment methods
  • Human contact: Nigerians value human interaction when shopping. They like to touch, feel, and speak about the product. Have customer relations managers call customers after the item has been reserved online to make sure the customer really wants the product. Allow customers to touch and see the product on delivery
  • Online deals: Offer good online deals to highlight the appeal of online shopping and build recurring customers as Nigerians are very price sensitive and will compare prices
  • Trust: Nigerians are very suspicious of buying online considering high levels of cybercrime. Once trust is established through the steps outlined above, customers will shop online for your products with fewer reservations
  • Challenges: Nigeria’s Ecommerce industry faces various challenges including poor infrastructure, road congestions, power blackouts, the high cost of internet, and cybercrime

Trend #3: The Security Situation in the North Is a Threat to MNCs

A new militant Islamist group called Ansaru emerged in the North of Nigeria, changing the security situation for MNCs in the region for the worse. Companies operating in Nigeria’s commercial centers including Lagos and the South are not in danger from this group.

Ansaru, a more radical breakaway group of Boko Haram, came to the forefront in 2012. The movement is heavily influenced by Al-Qaeda in the Islamic Maghreb (AQIM) and motivated to fight French and Nigerian military intervention in Mali. Ansaru’s agenda is far more international than Boko Haram’s. It is being manifested for the first time with the systematic kidnapping of foreigners. Boko Haram’s grievances are primarily local and come down to skyrocketing unemployment and poverty in the North of the country (60-70+%). It primarily aims to weaken the government which it blames for the precarious economic situation. But as security forces vehemently cracked down on Boko Haram militants, weakening its leadership, the movement fractionalized, creating a more radical offshoot. Companies should monitor closely whether attacks against foreigners are increasing and prepare for insecurity in hot spot regions.

 

PODCAST: Kenya Prepares for Upcoming Elections

Aly-Khan Satchu, FSG Expert Advisor and Anna Rosenberg, Senior Analyst for Sub-Saharan Africa discuss the implications of Kenya’s imminent election and how businesses operating in the region can best prepare.

Key questions answered include:

  1. Atmosphere in Kenya preceding general elections –how high is the risk of post-electoral violence?
  2. What impact will the election have on companies currently operating in the region and what can companies do to prepare?

To listen to or download the podcast, click on this link to access the iTunes store.

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Aly KhanAly-Khan Satchu is the CEO of the East African Financial Portal http://www.rich.co.ke.  He is a banker by training and worked several years in the City of London. He worked for Credit Suisse First Boston, was a Managing Director at Sumitomo Bank, as well as at ANZ Investment Bank and Dresdner Bank. Aly Khan is originally from Kenya and returned to his home country six years ago, and today is an advisor to a number of African Governments and Investors. For the last three years, Aly-Khan has been an active Investor at the Nairobi Stock Exchange, the USE and various other African Stock markets.

 

Building Brand Equity in Ethiopia: Getting in on the Ground Floor

Ethiopia

From Addis Ababa to Mekele, my latest trip to Ethiopia provided insights for the improving investment climate, in particular for consumer goods companies. Despite the absence of international food chains, American and European personal care and household products fill the shelves of small stores in the capital and other parts of the country. Johnnie Walker brand of Scotch Whiskey is seemingly ubiquitous in bars across the country. Diageo’s other important presence in the country, the recently acquired Meta Abo brand, competes with local beers that are supported by foreign companies like St. George’s (France-based BGI Group) and Dashen (British equity firm Duet Group). This is an important trend, because foreign interest in local breweries has acted as a leading indicator of foreign investment in other African countries.

Isuzu trucks and Volkswagen Beetles are among the cars of choice on Ethiopian roads, which is partly due to the wide availability of spare parts for both vehicles. A slowly improving roadway infrastructure connecting rural areas should be a welcome sign for the future investment opportunities. Foreign investment from big players, such as mining companies and the Chinese government, is already contributing to transportation upgrades in the northeast part of Ethiopia. Anecdotally, Caterpillar tractors played a prominent role in many of these road construction projects. The northern historical circuit, which is a prominent tourist route, should benefit from increasing popularity during the next several years.

Foreign multinational companies are already lining up to support the Ethiopian government’s ambitious initiatives to improve the agricultural sector, which accounts for 85% of employment. Public spending plans are focused on improving crop yields for small farmers. Despite investor interest in supporting these projects, the government has so far prioritized partnerships with multilaterals and NGOs rather than foreign companies. While not currently viewed as major partners, foreign companies are seen as current and future customers.

Overcoming famine in the mid-1980s and significant political transformation, Ethiopia is positioning to emerge as a critical destination for doing business in Africa during the next decade. The country’s population of 85 million people is second only to Nigeria’s among African countries. Foreign investment will be critical to help the government keep pace with population growth and to upgrade infrastructure in important sectors like agriculture, healthcare, tourism, and transportation.

Historically, doing business in Ethiopia has been heavily reliant on relationships with influential politicians and those well-connected to officials. A transition to a more liberal and open business climate will be a slow process (see After Prime Minister Meles Zenawi’s Death – What’s Next for Business in Ethiopia?). In the meantime, foreign companies should continue to seek ways to enter and expand to capitalize on opportunities despite lingering operational challenges. Perhaps senior executives could start by grabbing a stool at one of the Hilton or Sheraton hotel bars, where they will find many of Addis’ business elite relaxing and drinking a Johnnie Walker scotch or a St. George beer.

The Key Trends that will shape Nigeria in 2013

Nigeria in 2013 will provide a mixed picture for investors. While the government’s 2013 budget promises to open new investment opportunities, challenges lie ahead. Renewed fuel subsidy reductions will impact consumer purchasing power while the security situation in Nigeria’s hot spot regions is likely to deteriorate.

Trend #1: The Proposed 2013 Budget Creates Investment Opportunities
The Federal Government submitted the budget proposal to the National Assembly for approval. An increase in spending means opportunities in sectors that have received budget allocations or investment incentives. Focus areas for the economy in 2013 are security, education, infrastructure and healthcare. The 2013 budget aims to create long-term macroeconomic stability through continued investment in capital expenditures, deficit reduction, and the development of non-oil revenue sources.

Trend#2: New Fuel Subsidy Reductions will Impact Consumer Purchasing Power
The government launched a new campaign to remove the fuel subsidy in the medium-term, a year after the attempted removal caused widespread protests. New plans will see the fuel subsidy gradually reduced through 2015. Consumers will be hit hardest by the fuel subsidy reduction as purchasing power for non-essential goods is likely to decrease. This comes after consumers were strained in 2012 when fuel subsidies were reduced for the first time. The initial impact of the subsidy reduction will be felt in early 2013. As a result, renewed protests are likely to hit the country once the new reductions are announced. Companies have to reach new customers to compensate for any potential decrease in consumer purchasing power.

Nigeria

Trend #3: The Security Situation is Likely to Worsen
The government allocated the lion’s share of the budget (668.51 billion Naira) to security, indicating that tackling Nigeria’s many security challenges is a key priority. However, companies should prepare for increasing insecurity in hot spot regions as violence is likely to increase if the budget is spent on recruiting more personnel into badly managed security forces that crack down brutally on dissent rather than on investing in better management and training.

Nigeria’s security challenges include bombings by Boko Haram and ethno-religious clashes in the northern and central areas, kidnapping, oil theft and piracy in the Niger Delta, and kidnappings in the Southeast. But the violence is about Nigeria’s acute social disadvantages and widening wealth gap.

  • Boko Haram: The group’s frequent attacks cannot simply be attributed to Islamist militancy, but rather longstanding socio-economic grievances and skyrocketing unemployment. The group is fighting the government which it blames for the precarious economic situation. As a result, the group wants to install Sharia law because it believes secular law is too corrupt and only religious law can establish order. The security forces’ vehement crackdowns and resulting civilian casualties contribute to an expanding base for recruitment.
  • Niger Delta: Similar to the situation with Boko Haram, unemployment and poverty is driving crime in Nigeria’s main oil producing region. In 2009 the government issued an amnesty to all militants with the failed promise to create employment. Instead, criminal activity has increased, specializing in oil theft (150,000 b/d, worth US$7bn annually) and kidnappings.

Having a contingency plan allows companies operating in these regions to manage risks and seize opportunities as they materialize.

*Editors Note: Don’t miss Anna Rosenberg’s latest article on managing distributors in sub-Saharan Africa