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Daniel is a consultant at Cooper Financial Research and has served as a project finance advisor at the American Strategic Resources Group. Previous experience includes the Bureau of Asset Management at the Comptroller's Office of the City of New York, specializing in short-term fixed income... More
  • Engaging The African Market Through Philanthropy: 4 Companies That Are Establishing A New Paradigm, And What It Means For Investors 0 comments
    Mar 1, 2012 1:33 PM | about stocks: PEP, CSCO, HINKY, BAA

    Procter and Gamble (PG) recently received commendation from the Secretary of State for Corporate Excellence. CEO Robert MacDonald used the platform to discuss a holistic approach to building business in frontier markets. "We have an amazing congruence [in Africa] between what other people call corporate social responsibility and our business-building efforts," he gushed to Bloomberg in an interview on January 19th. While such statements from company executives tend to be taken with a rather large grain of salt, a close look at Western corporations operating in Africa indicates that MacDonald's breathless proclamation is actually indicative of a new and relevant business strategy.

    Many multinationals in the developing world have conducted extensive social responsibility programs, yet in the past they were far from comprehensive. They were happy to do some good in the countries in which they operated, but the overall socioeconomic picture was considered beyond the scope of what they did and generally irrelevant to their core business. However, there has been a slow shift with programs such as the Clinton Global Initiative ("CGI"), which aims at large-scale development projects by coordinating the efforts of many of the world's largest corporations. Not only are these laudable efforts that improve the lives of millions of people, but they are helping to develop new avenues of doing business in the developing world. Therein, Africa provides a significant growing market. According to McKinsey Global Institute's projections, the continent will by 2020 reach $1.4 trillion in consumer spending annually, have 128 million households with discretionary income and a population that is 50% urbanized. Contributing to development is a win-win in terms of corporate responsibility and engaging one of the fastest growing consumer bases in the world.

    A prime example of such corporate synergy is Cisco (CSCO), which has contributed significantly to a number of CGI initiatives in Africa and other parts of the developing world. In addition to non-profit staples like Habitat for Humanity and Teachers Without Borders, Cisco has partnered with two organizations that will directly help them grow a consumer base: One Global Economy and Inveneo. The former is dedicated to increasing broadband coverage in homes and developing a portal that will allow young people to connect to employers and social service databases. The latter is directly concerned with providing information and telecommunications technology to NGO's and government organizations that will facilitate the provision of social services and the dissemination of information thereof. Needless to say, Cisco's core business will be greatly helped by a society with greater technological literacy and infrastructure. As a greater number of people use broadband technology to find jobs and services, it follows that demand among businesses and households for more sophisticated broadband technology will grow in the coming years, providing an opportunity for Cisco to find fruit in its ambitious geographic expansion strategy.

    The evidence shows a growing emphasis on this strategy, as gross margin from Africa/Middle East sales as a percentage of the total jumped from 7.9% in 2010 to 11.2% in 2011. Cisco had something of a down year in 2011, and many analysts cited overly aggressive expansion into new markets, in addition to increased competition and a confluence of factors that JP Morgan analyst Ron Hall described as "death by a thousand cuts." However, with a quickly growing consumer base in many African countries, Cisco's expected rebound (according to two of my Seeking Alpha colleagues,http://seekingalpha.com/article/321611-cisco-resurrected-and-rising-toward-30, http://seekingalpha.com/article/320995-cisco-s-50-upside-dwarfs-juniper ) will help them ease into developing markets. It is possible that the capital expenditure investors have subsidized in the past year will begin to pay off in places they had not expected. Those getting in now will likely be able to benefit from other revenue increases and strong stock performance while the company sets itself up for increased sales down the road.

    Similarly, Pepsi Co (PEP) joined the CGI initiative "Enterprise EthioPEA, 2011" along with USAID, the World Food Programme and the Ethiopian Institute for Agricultural Research. The 2 year, $6 million project will develop local production of ready to use supplementary food (RUSF), working with local chickpea farmers who will eventually be able to increase production to export levels. Given the severity of the famine afflicting the Horn of Africa, with some 13.3 million people needing emergency food relief according to US officials, this initiative is a significant humanitarian undertaking that will help develop a very positive image for the company in the region. In addition, with the commitment to a "market-based" solution, Pepsi is putting itself in a long-term position to benefit from private sector development. Below is some of Pepsi Co's financial data for the Emerging Markets region from 2006-2010, in billions of US Dollars:

    While the operating income has remained somewhat flat in spite of increased investment, revenue and assets, it is clear that the company is very much invested in promoting its Emerging Market sales. The commitment to humanitarian projects will not only give Pepsi a strong selling point, but will involve them directly in the private sectors of East African economies. By establishing ties with agricultural producers, Pepsi is opening itself up for a foothold in the agriculture sector, crucial in many African economies. With the experience, contact and knowledge gained, done at very low cost, Pepsi and its subsidiaries could engage in more significant local production and sourcing, a cost-saving measure that would allow their products to be priced competitively in the market of the developing economies of East Africa and perhaps exported to nearby regions with higher production inputs. In fact, there is a precedent of companies that have substantially increased emerging market sales through local sorurcing.

    While not falling under the direct purview of philanthropy, Heineken (OTC:HINKY) recently began a 9 year commitment to source 60% of its raw materials for its African beer brands from Burundi, the Democratic Republic of Congo ("DRC"), Ethiopia, Ghana, Nigeria, Sierra Leone and Rwanda. Among these are some of the fastest-growing economies on the planet, with Ghana leading the world in 2011 at an estimated 16% GDP growth rate (more detailed analysis can be found in my article here: www.asrgonline.com/GhanaForecast.pdf). Rwanda continues to benefit from increased domestic consumption, particularly in the telecom sector, and from sound fiscal policy. Nigeria, and to a lesser extent the DRC, have emerged as regional economic powerhouses, as oil and mining profits have overshadowed turbulent domestic politics.

    Though not philanthropic, this is a coordinated project with NGO's that will involve Heineken directly in the economies of developing markets, likely facilitating growth and jobs. Tim Seymour has already written about Heineken's commitment to increasing sales in emerging markets (http://seekingalpha.com/article/253403-if-beer-emerging-markets-heineken-s-results-are-bullish), and therein, Africa provides significant opportunities. At the tail end of last year, both Heineken and Anheuser-Busch raised prices about 6% in Belgium, citing higher energy and raw material costs (http://www.cnbc.com/id/45813784), and prompted government scrutiny.

    Take the case of the DRC. Heineken owns Bralima, the country's largest brewery, and began local sourcing in 2006, buying 2,000 tons of rice. That year, the subsidiary reported a 40% increase sales over the previous year, with only 17% coming from Kinshasa and a surprising growth in the oft-troubled Eastern regions of the country. By 2010, local sourcing of rice reached over 11,000 tons, which Heineken claimed was even more than they needed for production that year. It is axiomatic that most countries see a surge in demand for beer as their economies become more developed. With only 3% of Congolese as beer consumers, Bralima's activities in building roads and financing independent transportation companies to help deliver their products across the country and its massive advertising campaigns put it in a unique position to develop both its consumer base and its sales. More significantly, the NGO partners will help underwrite Bralima's DRC expansion, which will include a new brewery in the DRC's second biggest city. Through this program, investors will not have to bear too much of the cost of this expansion.

    Even mining companies, once considered the epitome of "get in, cash out", are starting to follow this pattern by making large-scale efforts in conjunction with the Clinton Global Initiative. Banro (BAA), which developed the first commercial gold-mining operation in the Democratic Republic of Congo (DRC) in 50 years, showed such determination in this area that it established the Banro Foundation long before the company was in a position to extract revenue from its mines. Formed in 2005, the Foundation has been extremely active, receiving a Merit of Honour from the MRJC (Mouvement de Reveil de la Jeunesse Congolaise, a national youth association) in 2009 for its various efforts. In 2011, Banro became a member of the CGI and completed its most successful year to date, finishing $1.16 million dollars' worth of charitable initiatives in the education, healthcare and social infrastructure sectors. Operating in the East of the DRC, a region considered politically risky, Banro has managed to engage local communities significantly while still maintaining an immensely profitable operation.

    According to Cooper Financial Research, Banro delivers gold for investors at an estimated cost of $574 dollars per ounce, among the lowest of any mining outfit (http://www.cfmonitor.com/free_financial_reports/african-gold-report-4/). The discount relative to other firms is likely a function of the aforementioned political risk in the region. Paradoxically, however, there are other investment positives that are a function of the DRC's troubled political circumstances. The government needed to take out large loans from international financial institutions to re-build the country after the civil war, and is therefore held to a very high standard of transparency and accountability as far as its finances are concerned. For the same reason, the economy remains highly dependent on the mining sector.

    In a way, humanitarian efforts are a good hedge against government shenanigans, which surrounded the expropriation of First Quantum's assets in 2010. The Kabila government would risk a massive loss of support by taking away thousands of jobs and strong-arming a company that has gone out of its way to help Congolese people. This is a risk Kabila simply cannot afford in the wake of a controversial and hotly contested election in November, when some of the provinces in which Banro operates showed strong support for opposition candidate Vitale Kamerhe. That the newly reelected incumbent settled the First Quantum case out of court earlier this year is a sign that he and his colleagues are aware of these risks. In Banro's case, charitable initiatives safeguard investors from political and economic risk, and allow them to profit from the discount implicit in operating in the DRC.

    To tap the potential of the African markets, companies are taking corporate social responsibility more seriously for a variety of reasons. Whatever the underlying philosophy, one thing is clear: in a region where politics and business so often intersect, and where so much good can be done with so little money, it never hurts to win over the people before you try to sell them anything. Investors might for once be well served by listening to executives touting their philanthropic efforts.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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