September 02 2014 Martin Tronquit
Investment Research

Five false ideas about Africa

1. Africa is a cheap place to do business

No, Africa is not a low-cost business destination. On the contrary several of its most attractive destinations are extremely costly, like Luanda or to a lesser extent Lagos. Several factors account for this and it is important to understand them.

  • Talent is scarce, so the best and brightest command very high salaries. In addition the tax rates on these salaries are often very high to compensate for the small base of people officially employed.
  • Logistics is a challenge. In many countries the infrastructure is weak, leading to port and road congestion, long transportation times and lots of waste.
  • The route to market is also long. Instead of simple manufacturer → wholesaler → retailer → consumer routes, in Africa the number of intermediaries can be very high, with each of them taking their margin.

  • African markets are often small and it is difficult to generate economies of scale. For example, the Moroccan pharmaceutical market is worth approximately €1bn with more than 20 players competing. With €50m sales it is impossible to have sufficient scale to produce effectively.
  • Energy is an issue. In many African countries companies need to generate their own electricity using generators, making energy a high-cost overhead for businesses.
  • Competition is limited in many markets. Monopolies and oligopolies are commonly found, driving prices up. In addition many governments enforce tariffs to protect their industries, preventing cheaper foreign products from coming into the market.

2. Knowing the African customer is the only key to success

Many western companies are convinced that consumer intelligence is the only key to success in Africa. That may be true in markets where reaching the customer is a no-brainer, given the structured distribution channels and the strong brand awareness of customers.

But in Africa getting to the customer is a challenge: How do you get the products into the country? How do you select your distributors? Which retail formats will you leverage? How is the retail price going to be built? How do you physically move your products to the retailers?

It is therefore as important to work on the route to market, than to conduct consumer research, and even more important is to combine both.

3. Africa is a huge market, so it must have tremendous potential

More than a billion people with impressive economic growth rates. That is why so many decide that Africa is surely a lucrative market. However, the reality is vastly different. Africa is 54 markets, each with different regulations, consumer patterns, price levels, etc. You will mostly play in only a few of these countries.

Each market is divided between areas that are easily accessible and those that are hard to reach. Recently one of our clients in the luxury alcoholic beverages industry gave the example of Mozambique. He said reaching customers in the capital Maputo is cheap and easy, but 70% of the potential is outside of Maputo where it is difficult and costly to reach buyers.

Another client explained the capital Addis Ababa is currently their only addressable market in Ethiopia, and that they would wait and see before targeting other areas of the country, thereby taking 90% of the population out of play.

Many would-be investors make a fuss about Africa’s emerging middle class. But the percentage of the general population with discretionary income is limited. The vast majority remain poor.

4. Africa is a wild and risky investment destination

Investors often overestimate the risks of investing in Africa as news they receive tend to focus on horror stories. In fact many countries rank very well in terms of doing business. Mauritius, Botswana, South Africa and even Rwanda rank within the first quarter globally among the best countries in which to do business.

Infomineo’s own experience with our offices in Morocco and Egypt is that while it is more challenging to operate than in say Britain or Germany, it is certainly possible.

5. The economy is only driven by natural resources

Many people think that African economies are driven by oil, gas and mining. This is wrong. The key industries in Africa are in fact agriculture and services.

Did you know that oil accounts for less than 20% of Nigeria’s GDP? Did you know that Morocco is a large producer of cars and of aircraft components? And that South Africa’s mining industry is smaller than its services sector?

Martin Tronquit, Managing Partner, Infomineo.

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