There is no easy way to build distribution partnerships in Sub-Saharan Africa, according to Anna Rosenberg, Senior Analyst for Frontier Strategy Group. In our latest podcast, FSG’s CEO, Richard Leggett, interviews Rosenberg on her recent report about the distribution landscape in Sub-Saharan Africa. The podcast outlines examples for how Multinationals can find, vet and manage distribution partners in Sub-Saharan Africa.
To listen to or download the podcast, click on this link to access the iTunes store.
Getting electricity in Nigeria can be very difficult. The World Bank ranks the country 176 out of 183 as one of the worst places in the world to get electricity. Electricity supply is unreliable and power outages are frequent numbering more than 320 days per year.
As a result, businesses largely generate their own power from diesel generators which run on fuel. Both the outages and the generators increase operational costs as blackouts harm machinery while the cost of generators, including maintenance, fuel, and its transport, is high.
Already in January, with the reduction of fuel subsidies, the cost of fuel increased 50%. But now, businesses will again be hit by higher operational costs as the government increased electricity tariffs on June 1. Large businesses will see their electricity bills increase up to 50%, depending on geographic location.
Consumers are also impacted by the new tariffs as they will face higher prices as increased production costs are passed down. Coupled with the reduction of the fuel subsidy in January, this will cause consumer purchasing power to decline further, forcing consumers to be more cautious with discretionary purchases.
Electricity prices will continue to rise, with new price increases planned for early 2013. The prices of both, electricity and fuel, are distorted by government subsidies. The subsidies are likely to be further reduced in the short-term and removed altogether in the medium-to-long term.
The reductions of subsidies are part of the government’s plans to attract private investors to the power sector. If successful, this could benefit businesses operating in Nigeria as market-rate prices will allow private competition to enter, ultimately increasing the consistency of energy supply and bringing down prices as the market matures.
While Nigeria remains one of the most attractive long-term investment destinations in Sub-Saharan Africa, companies operating in the northern and central regions are facing operational risks resulting from increasing insecurity and revenue losses as consumers are staying at home.
Contrary to mainstream media coverage; the frequent attacks in northern and central Nigeria cannot only be linked to Islamist Group Boko Haram. The escalation of violence is born out of socio-economic grievances and longstanding tribal, ethnic, and religious animosities.
While the south is experiencing an economic boom, the northern and central areas are not. Instead they are struggling with staggering poverty levels of 60-70+%. Attacks have so far mainly targeted government officials and churches – both representatives of the wealthy south.
As violence increases, businesses divert investments southwards contributing to economic decline in northern and central Nigeria. However, companies that maintain a presence in affected regions can increase customer loyalty and gain market share by highlighting their commitment through tough times. Having a contingency plan allows companies operating in the area to manage risks and seize any opportunities as they materialize.
Some companies already see investment opportunities in affected areas. Considering the risk level relatively low compared to other dangerous areas such as the Niger Delta, Dufil Prima Foods, part of the Singapore-based Tolaram Group, recently opened a manufacturing site in the northern city of Kanu to save on transportation and distribution costs. South African telecoms provider MTN is also making major investments in radio and transmission to increase its capacity and offer improved services to customers.
With the eurozone falling into recession and most of CEE following closely behind, multinationals increasingly look to Turkey as a growth engine for their EMEA business. However, growing competition on the Turkish market means that companies need to build scale into their Turkish business to maintain profitability. One strategy a growing number of multinationals are pursuing is leveraging Turkey as a regional hub. In fact, Frontier Strategy Group’s research finds that companies that based their regional hub in Turkey improve their profitability well above the global average for their company.
Why are these companies doing so well? Basing a regional hub in Turkey has two benefits: cost savings and customer access. Turkey’s geographic position as a hub, its extensive trade agreements with countries in the region, and strong infrastructural and cultural linkages to the Middle East, North Africa, Balkans and Central Asia regions, offer global multinationals access to over 1 billion potential customers.
However, Turkey’s main attraction are the cost savings companies can realize when locating a hub there. Turkey’s large and growing domestic market, with 75 million customers and a vibrant business sector, makes the country a viable alternative even to established hubs in places such as Dubai. The size of Turkey’s market is complemented by the country’s large skilled, and relatively cheap labor force that allows companies to build a sales hub, to manufacture, and even to conduct R&D activities locally. Finally, Turkey’s favorable investment climate means that companies can confidently make the large, long-term investments that are required when setting up a regional hub.
Leading global multinationals are already benefiting from the opportunity to hub in Turkey. Some companies have selected Turkey as a hub for the larger EMEA region, for example The Coca Cola Company, manages more than 90 markets from its Istanbul regional headquarters. Other companies use Turkey as a regional sub-hub managing a limited number of smaller regional markets. For example, Pepsi, Adobe, Huawei all manage 10-20 regional markets from Turkey. Illustrating this trend, global multinationals such as Sanofi and GlaxoSmithKline both relocated their regional headquarters from Dubai to Turkey in the past 6 months. More companies will no doubt follow.
Nigeria is a tale of two regions as city-level opportunities in the south overshadow widespread insecurity in the north. Companies must overcome corporate HQ fears regarding operational risks to position for long-term success in Nigeria, which remains the most attractive long-term investment destination in Sub-Saharan Africa.
Last month ethnic conflict ravaged northern Nigeria, leaving 150 dead and 100 injured. This continues a troubling trend of violence in 2012. From an investment perspective, this has rattled foreign companies that are wondering if Nigeria is becoming too risky. However, halting or drastically scaling back investment plans would be a mistake for senior executives.
Much of the violence is isolated in the economically underdeveloped north. The total GDP of 7 attack locations between April 5 and May 4 is US$25 billion, which represents less than 10% of Nigeria’s economy. On the other hand, the total GDP of 7 top investment destinations in the south is US$80 billion. This represents more than 30% of Nigeria’s economy.
Nigeria’s five largest cities, all of which are located in the south, have a combined GDP exceeding US$75 billion. This is surpassed only by Angola and South Africa. City GDP in Nigeria’s south is set to expand significantly this quarter, even if only on paper, because the government is shifting the base year for real GDP to 2009 from 1990. The result will be an overnight gain of 40% that closes the overall economy size gap between Nigeria and South Africa to only 10%.
Southern cities represent great opportunities for companies targeting emerging consumer classes, public sector projects, and other private sector companies flocking to urban areas. Companies should establish good relationships with distributors that know the southern part of the country well. Much of your sales opportunities are likely to be concentrated in this region for the foreseeable future.
Sub-Saharan Africa’s potential for economic growth is no longer a secret.
Some estimates show Africa having as many middle class households as China by 2020.
The region is expected to set the pace for global growth over the next five years, with economic expansion averaging 6 per cent per year. China increased Africa investment by almost 60 per cent last year, while India pledged to expand trade volume to $90bn (£56bn) by 2015.
Much of this investment will be concentrated in fast-growing sub-Saharan African markets like Angola, Kenya and Nigeria. Multinational corporations are increasingly concentrating resources on these types of markets to make up for economic volatility in Europe and political uncertainty in the Middle East and North Africa.
In a survey conducted last year, 42 per cent of senior executives focused on Europe, the Middle East and Africa (Emea) revealed that they are planning to set up a direct presence in at least one sub-Saharan African country in 2012. More than one-fifth of polled executives said they plan to establish an African managing director role within two years to oversee regional operations.
Multinationals intend to capture average profit margins greater than 10 per cent and returns on capital 60-70 per cent greater than in high-growth markets like China, India and Indonesia.
If multinationals want to capitalise on all that Africa has to offer, then a fundamental shift must take place in the way that companies prioritise markets for resource allocation decisions. Africa is far too big and complex to look at as one market, or even as a portfolio of countries. Companies must look at the African opportunity as a portfolio of cities, targeting the urban areas that offer the best opportunities for their business.
To continue reading the full article, visit the Financial Times website.
If you are not going direct in Turkey, then you are likely missing out on a tremendous opportunity for your business. In our latest research on the market opportunity in Turkey, Frontier Strategy Group identified three questions you should ask about the state of your operations in Turkey:
- Turkey’s M&A market is ripe for acquisitions, but MNCs increasingly have to compete with private equity funds for the best assets. How is your company leveraging acquisitions to grow its presence in the Turkish market?
- MNCs leveraging Turkey as a regional sales hub are 9% more profitable in Turkey than the global average for their company. How is your company taking advantage of Turkey’s growing position as a regional hub?
- Turkish distributors are 23% cheaper as a percentage of profit margins than the global average. How effective is your company at leveraging distributors to increase market penetration in Turkey?
Companies are moving to more direct models in Saudi Arabia to capitalize on increasing public expenditure in priority sectors like education, healthcare, housing, and related infrastructure.
A local presence allows MNCs to be closer to customers and to leverage partners more effectively.
Companies know their products better than distributors: Visiting local partners on an infrequent basis is not enough to imbue expertise in your product offering. There will always be a gap between realized and actual market potential without this knowledge.
Closer oversight of partners: Establishing a more direct presence allows companies to manage local partners closely and take advantage of special treatment due to the government’s mandate to prioritize companies with a local presence.
Business climate stability amid regional uncertainty: The Saudi market is growing in regional importance as companies de-prioritize business in less stable markets such as Egypt, Iran, Lebanon, Syria, and Tunisia.
Recognition of rising MNC competition: MNCs must get closer to customers due to the rapid expansion of foreign MNCs and regional conglomerates into the Saudi market.
Frontier Strategy Group View
Companies should no longer expect to capture the full potential of the Saudi market if they are based elsewhere in the Gulf region.
MNCs are finding it easier and more necessary than ever to go direct or form joint ventures in Saudi Arabia. The commercial infrastructure improved significantly over the past decade, exemplified by Saudi Arabia’s #12 global ranking in the World Bank’s Ease of Doing Business Index.
Nigeria’s government must walk a tightrope to successfully implement its reform agenda and satisfy angry citizens who are feeling the pain of fuel subsidy rollbacks. However, a resolution to the current political impasse is likely so any major changes to your strategy is a mistake
- Fuel subsidy rollbacks caused gasoline prices to rise by more than 100% to US$0.94 per liter. As a result, Nigeria’s two largest unions called indefinite strikes that could threaten the economy if a compromise is not reached and work stoppages spread to the oil sector
- President Goodluck Jonathan is framing the rollbacks as critical for the economy, which was burdened by the recurrent costs that total more than US$6 billion annually or roughly 25% of the budget
- The government claims it will reallocate the cost savings to spend on education, healthcare, and the energy infrastructure. However, the public is skeptical due to past wasteful spending and a draft budget that allocated more money to security than health, education, and energy combined
Three ways you can respond to the latest developments in Nigeria
- Diversify your production toward more high-margin products
- Leverage Frontier Strategy Group’s making the case materials and city-level data to quantify ROI in Nigeria
- Consider forward-buying key imported raw materials with cash-flow management tools as price pressure is likely to maintain upward momentum
Three ways fuel subsidy rollbacks impact Nigeria’s investment climate in 2012
- More competition for the purse: B2C companies will face more cross-sector competition to capture discretionary spending from cash-strapped Nigerian consumers
- The rollbacks will stoke food and fuel inflation, which impacts most Nigerians whom live on less than US$2 per day
- Heightened price sensitivity may cause consumers to trade down for value in the short term
- Difficulty in making the case: Nigeria’s medium-term growth potential remains the best among African peers, but negative headlines will raise doubt among some risk-averse corporate centers
- The strikes coupled with a recent spike in sectarian violence will scare away some investors
- Higher cost of doing business: All companies with local operations should brace for higher costs as instability weakens the naira and increases the likelihood of a currency devaluation
- Strikes amid ongoing sectarian violence, mid-teens inflation growth, and depleted currency reserves raises the specter of a devaluation
- A silver lining of a currency devaluation would be to make Nigeria a more attractive regional export hub
While political instability dominated headlines in the Middle East, the Iranian rial quietly devalued by 35% against the dollar at local currency exchange bureaus during a four-month period. Continued devaluation increases the likelihood of further instability in the region
- Iran’s fragile economy will bend rather than break for the time being, but the devalued rial will place pressure on consumers that are already struggling to afford staple goods as a result of high inflation rates
- The Iranian rial’s steep depreciation is a result of effective sanctions preventing hard currency from flowing into Iran, exacerbating the current account deficit
- The result is more pressure on the system, which increases the likelihood of instability in Iran and the Middle East
Sanctions and political tensions underline a dreary economic outlook
- Increasing trade isolation: Iranian officials are finally admitting the toll of sanctions on the economy. An EU crude embargo and tighter US sanctions will worsen the situation
- Rising political tensions: The alliance of bazaar merchants, hard-line clerics, and Revolutionary Guard commanders will continue to marginalize Ahmadinejad and his allies ahead of the parliamentary elections in March 2012
- Dwindling foreign currency reserves: While the size of Iran’s foreign currency reserves is unclear, money in circulation increased by 20% in the 2H 2011. This is an indication that Iran is struggling to fund monthly cash payments to citizens that are meant to soften the blow of subsidy rollbacks
- Accelerating inflation growth: CPI is officially 20%, but prices are likely increasing by much more especially food and fuel prices due to the subsidy rollback initiative and tightening sanctions
- Eroding consumer and private sector confidence: Typically resilient Iranian consumers and merchants appear to be losing patience with the current economic conditions
- The government was forced to halt all direct official sales of gold as customers queued in long lines to swap their hard currency
- The rising cost of raw materials will further damage confidence in the economy
Iran’s economic volatility has regional and international implications for 2012
- Iran’s foreign policy will remain erratic: Ahmadinejad’s recent flirtation with conciliatory rhetoric will stand in stark contrast to Supreme Leader Ayatollah Ali Khamenei’s strategy to meet a “threat with a threat”
- Escalating tensions with Gulf Arab countries: Saudi Arabia and other GCC countries blame Iran for stoking popular unrest in the region. Their support for tougher Western sanctions will escalate tensions
- Danger of regional conflict: The fall of Syria’s regime, a key Iranian ally, would upset the regional status quo and could set off a proxy war in Syria or Lebanon
- Oil price volatility: More effective international sanctions would place upward pressure on global oil prices, though further deterioration in the eurozone could act as a counterbalance