Africa: The Final Frontier for Consumer Goods Companies

by: Investment U

By Tony D’Altorio

Investors are finally beginning to notice Africa…

  • They like its richness in much-needed commodities.
  • They appreciate its improving currency, political and economic stability.
  • They also like how the International Monetary Fund projects sub-Saharan 2010 growth at 4.75%.

Then there’s Jim O’Neill of Goldman Sachs, who originally coined the term BRIC for Brazil, Russia, India and China. He believes that Africa may join that coveted grouping over the next few decades.

O’Neill believes the combined potential of the 11 largest economies there is enormous. He even predicts they may trump Brazil and Russia, though not China or India.

Certainly, the continent is on a roll already. In Nigeria, Africa’s most populous country, the middle class population keeps growing.

The whole area has the dual advantage of being under-penetrated and underserved. So the global consumer product companies are suddenly noticing Africa have a lot to gain.

Africa… The Final Frontier

Once thought impenetrable, Africa now looks good to many businesses.

This makes perfect sense according to David Murray of Ernst & Young. “You could characterize it as the final gold rush for the large consumer products companies of the world, because where are they going to go after Africa? There’s nowhere left.”

Take beer, for example. China consumes 30 liters per year per person while Nigeria only goes through 10. Recognizing the potential growth there, SAB Miller is busy staking its claim. It already derives a third of its earnings before interest, tax, depreciation and amortization from Africa.

And Diageo ADR (NYSE: DEO) sells more Guinness in Nigeria than it does in Ireland.

Meanwhile, Wal-Mart’s proposed deal with South Africa’s Massmart Holdings ensures even more focus on Africa. Especially since Massmart has plans to expand across the continent.

More than likely, more manufacturers will want to follow the world’s biggest retailer. They see it as a way to help distribute their products and maybe their profits too.

They have good reason to think so, considering AT Kearney’s recent findings. Its survey showed eight out of nine West African subsidiaries of global consumer goods companies registered faster revenue growth than their parent company.

On average, it was twice the annual compound growth rate.

Infrastructure Problems = Logistical Nightmares

Crossing a new frontier is never easy though and Africa is no exception for consumer products companies. Dirt roads, and inefficient rail systems and harbors make it a logistical nightmare.

Consumer goods companies rely heavily on distribution. Yet any that venture out into Africa will have to brave poor infrastructure for a while.

Due to a lack of local supplies, they’ll have to pay higher costs to build plants too. That’s why brewing beer in Africa costs twice as much as in India and four times as in China.

Electricity poses yet another problem since supply is erratic at best in many areas. Even in South Africa, the state power provider Eskom offers less than reliable coverage.

Eskom can’t even deal with those problems before 2013. Meanwhile, power problems across the continent have forced many companies to build their own generators.

Even with all that aside, Africa suffers under high taxes and huge informal markets. Going back to beer again, estimates indicate moonshine consumption at 4 times bigger in volume than legally purchased alcohol.

Global Consumer Product Companies Set Sights on Africa

So yes, Africa has its problems. But global consumer product companies like it all the same.

And certainly, the lack of competition is compelling.

Working in the western world means a lot of competing for a sliver of market share. Not so in Africa though, with the exception of a few companies from China or India.

That makes it very attractive to big multinationals like Wal-Mart (NYSE:WMT) and Nestle. They compare it to China 20 years ago: a get in now or regret it forever deal.

More than likely, they’ve got it right.

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