africa potential report ajith

8/8/2019 Africa Potential Report Ajith

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International Business

Report on

Indian FMCG companies targetingAfrican market: Analysis of BusinessPotential and Risks

Submitted By: Ajith PullanikkatMaster of Business Administration, 2009 - 2011


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Contents

1. Executive Summary ................................................................................................................. 4

2. Introduction ............................................................................................................................ 5

3. Research Questions................................................................................................................. 6

4. Scope of Report ...................................................................................................................... 7

5. Research Methodology ........................................................................................................... 8

6. Overview ................................................................................................................................. 9

7. Details of main issue of report .............................................................................................. 11

7.1. Market opportunity in Africa .......................................................................................... 11

7.2. Why Invest in Africa? ...................................................................................................... 11

7.3. Government Policies that aids economic growth ............................................................ 12

8. Detailed analysis ................................................................................................................... 13

8.1. How should the FMCG companies approach the heterogeneous market structure of

Africa .................................................................................................................................... 13

8.2. Market potential for fast moving consumer goods in Africa ........................................... 13

8.3. Major risks in doing business in Africa and how they can be tackled .............................. 14

8.3.1. Low affordability levels of African consumers .......................................................... 14

8.3.2. Underdeveloped Distribution network and talent scarcity ....................................... 14

8.4. Analysis based on the Porter Diamond Theory ............................................................... 15

8.5. Analysis of the Objectives, Operating Environment and Strategy of the FMCG companies

............................................................................................................................................. 16

8.5.1. Physical and Social Factors....................................................................................... 16

8.5.2. Economic Analysis of opportunities in Africa ........................................................... 16


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9. Findings................................................................................................................................. 17

10. Recommendations .............................................................................................................. 18

11. Appendices ......................................................................................................................... 19

11.1. Appendix A: S-curve for fast moving consumer goods sector in Africa .......................... 19

11.2. Appendix B: Whats driving Africas growth? ................................................................20

12. Bibliography ........................................................................................................................21

Section Word Count

Complete Report 3903

Main Report 2906

Appendix 470


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1. Executive Summary

The study Indian FMCG companies targeting African market: Analysis of Business

Potential and Risks is aimed at understanding the various aspects of internationalbusiness which needs to be considered when multinational firms expand theiroperations to foreign countries. The study is focussed on Indian FMCG majors likeMarico, Emami and Godrej Consumer Products Limited (GCPL) who have recentlyexpanded their business operations to countries in Africa. The reasons for investing inAfrica are analyzed along with the future prospects and expected returns. The politicalpolicies and legal practices and economic factors of the foreign countries are analyzedalong with the business expansion objectives of these FMCG companies. The marketopportunity along with the government policies that aided economic growth in Africancountries is also covered as a part of the study. Various International Business concepts

are also briefed along with this to understand the business operations of the companiesbetter.

Based on the study it was found that Africa's business opportunities are potentiallyvery large, particularly for companies in consumer-facing industries.Recommendations on how the Indian FMCG companies can capitalize the growthopportunities of the African market and the strategies to be adapted to establish astrong footprint in the foreign market is also done as a part of the study.


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2. Introduction

The study on Indian FMCG companies targeting African market: Analysis of BusinessPotential and Risks is based on the latest move by the Indian FMCG majors likeEmami, Godrej and Marico to expand their operations to the emerging markets ofAfrica. This study is aimed at analyzing the reasons why Indian FMCG companies areexpanding their operations to Africa through Foreign Direct Investment. It alsoanalyzes the political, economic and business conditions in Africa. The benefits ofdoing business in Africa as well as the associated risks are also covered. The growthprospects in the emerging markets of Africa are also analyzed to understand the reasonfor the business expansion strategy of Indian FMCG companies to Africa.


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3. Research Questions

The study on Indian FMCG companies targeting African market: Analysis ofBusiness Potential and Risks tries to answer the following issues and concerns:

What is the market potential for Fast Moving Consumer Goods in Africa?How does the economic condition of Africa favour international business?How do the government policies of African countries boost internationalbusiness?How should Indian FMCG companies approach the heterogeneous marketstructure of Africa?What are the major risks and how they can be tackled?


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4. Scope of Report

The report analyzes the major aspects of African business environment that attractsmany Indian FMCG companies to Africa. It also focuses on the challenges faced by theIndian FMCG companies in Africa as well as their future prospects. The study isrestricted to only FMCG companies and the consumer goods market of Africa. Otherpromising sectors and industries in Africa are not considered as a part of this study aswell as report.


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5. Research Methodology

The possible issues and topics of the study are identified through exploratory researchmethodology. An investigative method is adopted to understand few selected issues.The focus of the research is on the impact of the selected topics and issues on themultinational firms. The research is based on the secondary data collected frominternet.


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6. Overview

The investment climate in Africa is improving. Many Indian companies are pumping ina billion dollars every year. Many FMCG companies in India are eying African marketconsidering the immense opportunities and growth potential in the continent. IndianFMCG majors like Emami, Marico and Godrej Consumer Products Limited havedevised strategies to tap the buying potential of the African consumers.

The Indian personal care and ayurvedic medicines major Emami is a 30 year oldgroup headquartered in Kolkata. The 165$ million Emami group has already expandedits operations to Africa in traditional business along with contract farming and powergeneration.

This move is seen as a part of the strategy to set up a regional hub in Africa.Currently Emami exports to around 60 countries in Africa. African markets

contribute 33% of the companys international business and in 4 years Emamiplans to make it 60%.

At present Emami is sourcing products from India as well as its facilities in othercountries to sell in Africa. The company has already laid out plans for some majoracquisitions in Egypt and plans to have three manufacturing bases in Africa in next 2to 3 years. As a part of this strategy, Emami has bought a manufacturing facility inEgypt for 12 crores which is aimed to serve as regional manufacturing base for Emamifor selling its products in Middle East, CIS, Europe, North America and Africa. Emamiis in talks with several companies in the personal space for acquisition.

The Godrej Consumer Products Limited (GCPL), another Indian FMCG major is alsoexpanding its international business by investing in Africa.

Since 2006, GCPL has acquired 3 companies in Africa namely Rapidol, Kinky andTura.Godrej Consumer Products Limited is looking for substantial business in hairextension in Africa.

Another Indian FMCG company Marico is looking for acquisitions in Africa aimed atstrengthening the companys distribution and to step up its growth momentum in thecontinent.

Marico recently acquired hair-care brand Fiance in Egypt as a part of itsinternational business strategy.In the short term, Marico aims to integrate this acquisition into their business andto cater the needs of Middle-East and North Africa and then gradually into othermarkets in Africa.


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A study by McKinsey Global shows that the Africas strong growth will continue at arapid pace. Africa has a large consumer market which is bound to grow over thecoming decade. Household spending is projected to increase to $1.4 trillion over thenext ten years if the continent's GDP grows at its current level. Africa's businessopportunities are potentially very large, particularly for companies in consumer-facing

industries, resources, agriculture, and infrastructure. This clearly shows that globalexecutives and investors cannot afford to ignore Africa's immense economic potential.

From 2005 to 2008, consumer spending across the continent increased at acompound annual rate of 16 percent, more than twice the GDP growth rate.The collective buying power of household is also increasing at good rates. This isthe driving force that creates huge demand for consumer goods in this continent.

Understanding the physical, social and competitive factors of the operativeenvironment in Africa and devising plans accordingly will determine the success rate of

th

e T

arget Africa strategy of Indian FMCG majors.


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7. Details of main issue of report

Africa as a whole has enough consumer power to attract many multinational companiesto tap the immense consumer demand in this emerging market.

7.1. Market opportunity in Africa

The population of Africa is comparable in size to the population of India. The highmarket opportunity of Africa is evident from the fact that if all the countries in Africacombined forces, they would be the 10th largest economy in the world ahead of Indiaand other big emerging economies like Brazil and Russia.

One major segment of the population in Africa includes average people living frommonth to month. This population include civil servants, hardworking nurses, andteachers etc who have very high aspirations. This is the main segment which drives the

economy and consumer markets in Africa.

One major area of immense potential is the cosmetics or personal-care productsand many multinational firms are tailoring their products to suit Africanconsumers.

7.2. Why Invest in Africa?

There has been a sea of change in the economic and political conditions in Africa.

In 1980, just 28 percent of Africans lived in cities. Today, 40 percent of thecontinents one billion people live in cities, a proportion roughly comparable toChinas and larger than Indias.

By 2030, that share is projected to rise to 50 percent, and Africas top 18 cities willhave a combined spending power of $1.3 trillion.

Many Africans are joining the ranks of the worlds consumers. Africa already has moremiddle-class households (defined as those with incomes of $20,000 or above) than India.Africas rising consumption will create more demand for local products, sparking acycle of increasing domestic growth. Retailing, telecommunications and banking are

flourishing in African countries. (Appendix B)

Africa has almost 60 percent of the worlds uncultivated arable land and a large share ofthe natural resources. Its consumer-facing sectors are growing two to three timesfaster than those in the OECDcountries. And the rate of return on foreign investmentis higher in Africa than in any other developing region.


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7.3. Government Policies that aids economic growth

The key reasons behind this growth surge included government action to end armedconflicts, improve macroeconomic conditions, and undertake microeconomic reformsto create a better business climate. African governments increasingly adopted policies to

energize markets.

They privatized state-owned enterprisesIncreased the openness of tradeLowered corporate taxesStrengthened regulatory and legal systemsProvided critical physical and social infrastructure.

The global race for commodities also gives African governments more bargainingpower, so they are negotiating better deals that capture more value from their

resources.


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a foothold or expand their presence will be well positioned to capture the value at stakeas the continents consumers increase their spending in the years to come.

8.3. Major risks in doing business in Africa and how they can be tackled

8.3.1. Low affordability levels of African consumers

In Africa, a major portion of the population and income remains at the base of thepyramid. This makes it difficult for the FMCG companies to build a sizable businessonly through premium products.

The companies will have to reinvent their business models to deliver the rightproducts at the right time. This makes it highly needed for the FMCG companies totailor the way they design products and create product portfolios. The local consumergoods companies at Africa will be having fundamentally a different cost structure andh

ence th

e Indian FMCG companies willh

ave to learn to compete against th

em.8.3.2. Underdeveloped Distribution network and talent scarcity

In modern Africa, trade is still nascent with the traditional mom-and-pop shops,open markets, umbrella vendors, and the like dominating the retail scene,making up more than 85 percent of the trade volumes.

Poor roads and infrastructure can make delivering products to consumers adaunting task, so the FMCG companies must build strong sales and distributionnetworks by leveraging a mix of third-party, wholesale, and direct-distribution

models.

Data about consumers needs and behaviour are scarce, making it harder todevelop specific consumer insights. In addition, the state of the communicationsmedia and education levels make it challenging to reach consumers with specificproduct messages.

To compete in Africa the companies need to bring a market-development mind-set, investing in consumer education and non traditional marketing techniques.

Despite the abundant work opportunities, high quality talent remains scarceacross Africa. To truly compete and win in the long term, the FMCG companieswill have to use a mix of local and international employees.


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Local capability-building programs, attractive career paths, and apprenticeshipopportunities will be critical to achieving long-term success for the Indian FMCGcompanies who are targeting Africa.

8.4. Analysis based on the Porter Diamond Theory

African countries enjoy certain competitive advantage which attracts the FMCGcompanies in India to those markets. One way of analyzing this competitive advantagecan be done based on the Porter Diamond theory.

Porter Diamond theory shows that four conditions are important for competitivesuperiority namely:

Demand conditionsFactor conditions

Related and supporting industriesFirms strategy, structure and rivalry.

Africa has a large consumer market which shows positive signs of strong growth.Africa's business opportunities are potentially very large, particularly for companies infast moving consumer goods industry. The consumer spending across the continenthas increased at a compound annual rate of 16 percent. This is the driving force thatcreates huge demand for consumer goods in this continent.

Africas labour force is expanding at a considerable rate. The availability of cheaplabour is another factor that attracts the FMCG majors in India to invest in Africa. The

political actions of African government were also aimed at creating a positive foreigninvestment environment.

As the African economy started growing, many multinational companies started theiroperations in the continent. These helped in creating a good distribution and logisticsnetwork which could be leveraged by the FMCG companies. The progress in theagricultural segment in the African countries provided support to the FMCG companiesin the form of raw materials.

The Indian FMCG companies which have invested in Africa have a stable business

model. The expertise and skills of these companies in India could be utilized to reap thebusiness opportunities offered in Africa. The strategy of these FMCG companies is tobuy facilities in the African countries to serve as a regional manufacturing base forselling its products in Europe, North America and Africa.


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8.5. Analysis of the Objectives, Operating Environment and Strategy of theFMCG companies

The main objective of the Indian FMCG companies for targeting the growing Africanmarket is sales expansion. With consumer goods tailored to the needs of the local

markets in African countries, these companies aim to draw considerable revenuethrough this international expansion. This would also help the FMCG companies toestablish a global footprint.

8.5.1. Physical and Social Factors

The political policies of the countries in Africa have been designed to support foreigninvestments. The governments in the African continent have gradually developed ahealthy legal environment that would aid international business operations. With anincreasing compound GDP every year, the economic conditions also favour the

business operations for the Indian FMCG companies.

Large availability of land and cheap labour also adds to the benefits of doingbusiness in Africa.

The entry barriers for foreign companies in the African soil are comparativelylow. By acquiring local consumer goods companies, these FMCG majors couldeasily avail the distribution network whichhas been already established.

Th

e modes of entry selected by th

e Indian FMCG companies for entering into th

eAfrican market include direct portfolio investments along with imports andexports.

8.5.2. Economic Analysis of opportunities in Africa

The opportunities of the African market can be well understood by analyzing its realand anticipated economic growth. It is forecasted that the total growth in thecompound annual GDP per capita would be 4.5 percent until 2015. This is expected toboost the consumer spending in the African markets by more than 35 percent. Thepopulation growth of 2 percent and continued urbanization may result in the entry of

around 221 million basic needs consumers in the African market by 2015. As a result,the total number of nations in Africa with more than ten million consumers and withgross national income exceeding $10 billion a year will increase to 30, from 22 today.This rapid growth creates an opportunity for suppliers and retailers of fast-movingconsumer goods.


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9. Findings

The main findings of the study are summarized below:

Africa has a positive investment climate which attracts huge amounts of foreigninvestments to the continentAfrica's business opportunities are potentially very large, particularly forcompanies in consumer-facing industriesThe cosmetics and personal care products is one of the fastest growing consumergoods segment in AfricaFMCG companies buy facilities in the African countries to serve as a regionalmanufacturing base for selling its products in Europe, North America and Africa


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10. Recommendations

Based on the study and findings, the following recommendations are arrived upon to beconsidered while Indian FMCG companies plan for business expansion and investmentin Africa:

Based on market potential and competitive dynamics, Indian FMCG companiesshould segment the African markets into several tiersIndian FMCG companies will have to design products and create productportfolios which are tailor made to the needs of local African consumersTo compete in Africa, Indian FMCG companies will have to investing inconsumer education and non traditional marketing techniquesAcquiring or partnering with the local consumer goods companies would helpthem to establish a strong sales and distribution network in the new marketTo bridge the gap caused by talent scarcity, Indian FMCG companies will have to

use a mix of local and international employeesCertain norms in Africa mandate reservations in the private sector which needsto be addressed by the Indian companies who plan to invest in Africa


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11. Appendices

11.1. Appendix A: S-curve for fast moving consumer goods sector in Africa

The product-category growth of fast-moving consumer goods typically follows a classic S-curve.The exact shape is determined by a countrys growth multiplierthe percentage increase in the

categorys sales per capita associated with a one-percentage-point increase in real GDP percapita. When the multiplier is low, the curve is relatively flat; when its higher, the curve

becomes steeper. The opportunity for sales growth in a category is greatest in the steep part ofthe curve.

The initial flat part of each curve shows the levels of GDP per capita that make a product too

expensive for most potential consumers. At this point, market penetration grows more slowlythan GDP per capita; it is called the warm-up zone. But as GDP per capita continues to grow, a

product category eventually reaches its takeoff point, which varies by category, depending on theconsumer needs it fulfills. After the takeoff point, penetration growth accelerates significantly

and often exceeds GDP per capita growth. Since this is where the greatest opportunities lie, it iscalled the hot zone.

At an even higher level of GDP per capita, categories tend to reach a saturation point, which, forinstance, can result from physical limitations (such as maximum calorie intake) or time

constraints. Finally, in the cool-down zone, penetration generally remains flat, despitepotential GDP growth, and consumers start to direct their incremental expenditures to different


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product categories. At this point, other factors have a large impact on category growth andcompanies must develop a deep understanding of them.

11.2. Appendix B: Whats driving Africas growth?

Real GDP rose by 4.9 percent a year from 2000 through 2008, more than twice its pace in the1980s and 90s. Telecommunications, banking, and retailing are flourishing. Construction is

booming. Private-investment inflows are surging. Analysis suggests that Africa has strong long-term growth prospects, propelled both by external trends in the global economy and internal

changes in the continents societies and economies.

The continents four most advanced economies Egypt, Morocco, South Africa, andTunisia arebroadly diversified. Domestic consumption is the largest contributor to growth in these countries.

Their cities added more than ten million people in the last decade, real consumer spending hasgrown by 3 to 5 percent annually since 2000, and 90 percent of all house-holds have some

discretionary income.


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12. Bibliography

Klaus Julian VOLL, May 2010, Africa and India: From Long-Standing Relations

Towards Future Challenges, Foundation for European Progressive Studies, Brussels

Boston Consulting Group, The African Challengers- Global Competitors Emerge fromthe Overlooked Continent, www.bcg.com, 20-Aug-2010, 0400 hrs IST

http://economictimes.indiatimes.com/features/corporate-dossier/How-India-Inc-is-cracking-the-African-market/articleshow/6344136.cms, 20-Aug-2010, 2200 hrs IST

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2288, 26-Aug-2010, 1800hrs IST

https://www.mckinseyquarterly.com/A_seismic_shift_in_South_Africas_consumer_landscape_2592, 17-Aug-2010, 1600 hrs IST

https://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/Africas_path_to_growth_Sector_by_sector_2602, 21-Aug-2010, 2000 hrs IST

http://headlinesindia.mapsofindia.com/business-news/fmcg/emami-plans-big-foray-into-africa-in-cash-crops-power-48736.html, 17-Aug-2010, 2200 hrs IST

http://www.africaspotential.com/, 03-Sept-2010, 2000 hrs IST

http://www.businessworld.in/index.php/Africa-Calling.html, 18-Sept-2010, 2000 hrsIST

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