Conquering Africa; What The Story Of South African Firms In Kenya And Nigeria Teaches Those Looking For Riches
BY MORRIS KIRUGA
MAIL & GUARDIAN JANUARY 3, 2016
At the arrival of democracy in 1994, South Africa was only making $11 million from Nigeria. Within a decade, that had gone up to $11 billion.
The battle to sell a brand in Africa: Pharrell Williams performs on September 21, 2015 in Cape Town, partof Woolworth's partnership with the artist on their 'Are You With Us' campaign. Image: Zyaad Douglas/Gallo Images/Getty Images.
IN JUNE 2015, Nestle, the world’s biggest food company, announced it had 15% of its workforce in sub-Saharan Africa amid slower growth of the continent’s middle class.
Cornel Krummenacher, chief executive officer of Nestle’s equatorial Africa (as sub-Saharan Africa is sometimes called) unit, caused a stir after he was cited as saying by the Financial Times famously saying; “We thought this would be the next Asia, but we have realised the middle class here in the region is extremely small and it is not really growing”.
Krummenacher’s comments typified the frustration both non-African and African businesses often have coming to grips with doing business on the continent.
But there are those who fallen many times, picked themselves, and finally succeeded. Many of them are to be found in South Africa. They offer some lessons on how to hit pay dirt on the continent.
Early knocks and hits
After the United Nations lifted sanctions on South Africa in the early 1990s, the country’s companies flooded north, eager to take advantage of post-apartheid and Mandela-good-feelings business opportunities.
Retailers, banks, telecommunications companies, and others all looked to the path carved out by SABMiller, South Africa’s most successful brand. Even during the apartheid period, SABMiller had expanded across the continent, snapping up new alcoholic drink markets.
One market that they failed to come to terms with was Kenya, in part East Africa’s most advanced economy had entrenched brands and was base to a host of multinationals. It’s for that reason that Kenya is interesting, because also being an open economy, it represents one of the most extreme barriers to entry placed by strong competitors, not government as in many parts of Africa. The Nigerian example is instructive too, beyond of the way the country forms loyalties to brands.
In the 1990s, Kenya became a graveyard of South African companies, unlike for example the greater success they had in Uganda, Tanzania (though quite turbulent), and parts of West Africa.
The failures made South African companies wary, but that is dissipating as investors learn from others’ mistakes, and hone adaptable strategies to break into African markets. There are many insights other businesses, therefore, can glean from the fortunes and misfortunes of South African companies in Kenya.
In 1998, an aggressive SABMiller launched its first full investment in Kenya, a production unit for its Castle brand in Kenya. Like South Africa where SABMiller’s predecessor had dominated the market since the 19th century, Kenya’s beer market is old.
The dominant brewer, East African Breweries Limited (EABL), has been making its word famous signature Tusker brand since the 1920s. The entry of SABMiller, more experienced and better funded, did not deter Kenya’s brewer, instead triggering a beer war to end all beer wars.
The war, surprisingly, hurt SABMiller more than it had anticipated, forcing it to pull out and sell Castle to its competitor. The only consolation prize was the distribution rights that EABL ceded to it in Tanzania. It was another decade before SABMiller thought of entering the Kenyan market again.
That early failure derailed the first post-apartheid wave of investments by South African companies into East Africa.
Very few companies had survived in Kenya in particular even during apartheid, and those that did, like Old Mutual, continue to grow rapidly to date. Coupled with the failure of brands such as Nando’s, Nu Metro, Telkom SA and Metro Cash & Carry, South African companies had reason to have headaches over East Africa.
Often, the main problem, as noted earlier, was a more locally-established competitor with a bigger market and better networks. The costs of competition became too high to continue, forcing a quick turnaround, sale of assets to the competitor, and a move to “friendlier” countries.
Nigeria, Uganda pain and joy
The same confluence of factors seems true for companies with franchise models too. Nandos, for example, has not only left the Kenyan market but also Lesotho, Malawi, Uganda, and Nigeria. Nandos’ exit from Nigeria is particularly interesting given the successes of companies such as MTN and Naspers in Africa’s most populous country. It probably points to poor adaptation of strategies, especially in marketing.
Woolworths, for example, floundered in Nigeria because it failed to read its would-be customers accurately. As wealthy Nigerians are famously brand savvy, they recognised the UK brand (also called Woolworths) that eventually closed shop, more than the South African one because the latter failed to make a mark.
Compare that to South African Airways’ special $90-a-piece rate for excess luggage for its routes to and from Nigeria. About 50,000 passengers fly the Jo’burg-Lagos route every year, most of them business class. On this specific route, passengers can carry three 32kg bags in economy and business class.
Wealthy Nigerians do not mind paying more for brands, service, and luggage. The brands that have understood this and shaped their message within the country around it have met monumental success. At the arrival of democracy in 1994, when Nelson Mandela was elected, South Africa was only making $11 million from Nigeria. Within a decade, this had gone up to $11 billion.
An emerging complication in the performance of South African abroad is legislation and tax regimes. MTN, South Africa’s most successful brand overseas after SABMiller, was slapped with an R56 billion fine in Nigeria and R9.3 million one in Uganda in the span of less than six months in 2015.
Nigeria is MTN’s largest market while MTN is Nigeria’s sixth highest non-oil source of revenue. The devastating fine crashed the telecommunication juggernaut’s share price and rattled the market. This mainly seems to affect already established companies more than new entrants, although the costs of entry have more often than not played a role in investment decisions.
And the rewards come in…
The aggressive investments into other sub-Saharan countries, despite the challenges, have had many rewards. Since 2013, sub-Saharan Africa has contributed more to SABMiller’s profits than Europe. In some cases, the successes have been far much higher than within the home market. Just five Shoprite stores in Angola, for example, sold more Red Bull Cans than all of Shoprite’s 382 stores in South Africa. Nineteen ShopRite’s in Angola also sold more bottle of JC Le Roux, a sparkling wine, than the South African stores. Another good example is DSTV subscriber numbers in Nigeria who are double the numbers in South Africa.
To figure Kenya out, South African companies experimented with several strategies. Instead of greenfield, start-from-scratch investments, they instead began to snap up already established entities thus acquiring managers with local knowledge, and avoiding some of the gropping in the dark that would come with a clean start-up.
South African investment giant, Sanlam, bought listed Pan Africa Life in 2005. In the brewing industry, 26% of Kenya Wines and Alcohol Limited (KWAL) was sold to Distell Group in 2013. MTN Business acquired UUNet Kenya while Altech increased its share in Kenya Data Networks.
Massmart, before its entry into the market, had unsuccessfully tried to buy family-owned Naivas Supermarket.
In manufacturing, Tiger Brands currently has a 51% stake in Haco industries and also bought Rafiki Mills and Magic Oven Bakeries. In banking, Old Mutual, which has been in Kenya for more than a century, launched an aggressive acquisition campaign where it bought, among others, the hugely successful Kenyan micro-lender Faulu Kenya. Stanbic Bank bought CFC Bank, giving birth to the CFC Stanbic Holding and Liberty Kenya Holdings.
Brave greenfield efforts
There are still a few companies using the greenfield investment strategy. In Kenya’s lucrative real estate sector, property services provider Broll entered the market in 2013. Sea food diner Ocean Basket also opened an outlet to take advantage of Kenya’s growing consumer culture.
Even the American brand Kentucky Fried Chicken (KFC) made its entry into Kenya through South African franchise holder Simon Schaffer. Other franchises such as Mr. Price, Steers, and Debonairs’ Pizza have met with mixed success in the Kenyan market. Mr. Price launched into an expansion programme that has seen it stamp its presence in almost all malls, new and old, within and around Nairobi.
South Africa’s success in Kenya and other countries has not been matched by a reverse success. A key problem seems to be apartheid-era caps and tariffs that South Africa retained for countries outside its regional blocs. Tea, Kenya’s most successful export to the world, attracts a four-rands-per-kg tariff to access the South African market. Soda ash attracts a 12% levy, making the market prohibitively expensive for Kenyan exporters.
According to the World Bank Ease of Doing Business Index, South Africa is the second highest ranking country in Sub-Saharan Africa, after Mauritius. Kenya places 15th. The world ranking is of little consequence to Kenyan companies and exporters who have found it near impossible to penetrate the South African market.
The trade deficit between South Africa and Kenya stood at $33 million at the resumption of relations in 1992. According to the 2014 Economic Survey, South Africa exported 70.7 billion shillings worth of goods to Kenya while the latter only managed 3.277 billion shillings.
Not looking beyond East Africa
Kenyan companies generally show less hunger for investments outside the East African region while South Africa has been aggressively investing across the continent as its home market becomes more crowded. This explains why, while there are over 40 successful South African companies in Kenya, there are very few Kenyan companies in South Africa. ARM Cement set up its South African subsidiary in September 2004. The arm has a capacity of 30, 000 tonnes per year, half of what the main plants in Kenya produce.
Olympia Capital, the NSE listed investment holding company, has struggled to make headway in South Africa. Its two subsidiaries, Plush Products Ltd. and Natwood Limited, were liquidated in 2009. Plush Products was a manufacturer of blinds and window decorating accessories while Natwood made wooden lifestyle products. Their successor, Tiespro Trading, was closed in 2013. The company made bathroom and kitchen fittings. Kenyan giants such as Safaricom, Kenya Commercial Bank, and Nakumatt are yet to show interest or capacity to invest beyond East Africa.
The battle to access the South African market heated up in 2015, with diplomatic tiffs over visa regulations and trade agreements. In March, Kenya was particularly miffed over a 2010 ban on avocadoes after some exports to South Africa were found to be infested with fruit fly.
Although the 120 million shillings a year worth of exports was relatively small, the concern is that most countries in the region will follow suit. South Africa’s lucrative market remains elusive for Kenyan exporters and investors. Kenya’s market, like many other Sub-Saharan markets, is still a working experiment for South African companies.