03.05.20
By Raymond Chimhandamba
Handas Consulting, Johannesburg, South Africa
Africa’s disadvantage becomes an advantage. With the kind of challenges that the continent faces, it is easy to have the mindset that AfCFTA will not take off and instead either ignore it or adopt a wait and see position.
The interesting thing about Africa is that in a few cases its weaknesses and disadvantages of the past have worked out to be advantages today. Take the trend of the mobile phenomenon as an example. Africa had a lot of people that had been waiting in the queue for years to get a phone installed in their homes. This problem was solved with the emergence of mobile phones. The increase in mobile subscribers has created a disruption as projections for new mobile subscribers have been beaten every year for the past 10 years.
The only other product I can think of that attracted more users than expected was the electric toothbrush. I believe the inventor of the electric toothbrush had paraplegics in his mind as his target market. Then it turned out that a good number of able bodied people wanted to use the product too. An inventor’s delight! Can you imagine discovering that your market is actually bigger than what you thought by several multiples? That is comparable to what happened to Africa and the mobile phone.
Imagine a situation where you expected the uptake of your device to be from managers level upwards. And then in reality you realize that the uptake is from supervisor level upwards. There is a whole band of customers that you had not quite expected to be your customers but are. And for the level of convenience that mobile phones offered, companies issued them to their teams at a really fast pace too, adding to the rapid pace of mobile phone penetration in the region.
According to a UN report, Africa has 650 million mobile phones, higher than the number of cell phones in the U.S. or Europe. The report indicates that in some countries in Africa, more people have access to mobile phones than people who have access to clean water, a bank account or even electricity. Just to clarify, I am not saying that the scenario that I have just described is a good thing. The point that I am trying to make is that things just work differently in Africa sometimes where there are completely different market dynamics than in other areas. This is why the cut and paste models do not quite apply to Africa. This high number of cell phones is driven by a situation where too many people have been waiting for a service for so long when a disruptive solution does come, it is pretty much over-subscribed. And as a result, Africa has led the world in the solutions around mobile money today. Africa also has the of not being tied down by legacy banking mind-sets of old because the penetration for bank accounts was not very high in the first place, they are free to experiment in a sense. Therefore we have seen how well M-pesa has done as a payment solution for rural and urban businesses alike.
To take another example, also from an emerging market, and in our space this time, one can also observe what happened with the Indian diaper market. One school of thought concludes that Unicharm’s strategy to introduce pants style diapers in India was aided by several factors that prevailed at around the same time. When Unicharm launched pants format diapers in India, per capita household income was beginning to rise, as more women were beginning to join the workforce. Salaries were also increasing because the economy was doing well. Diaper penetration at that time was very low anyway at 3%, according to a Cyber Media Research.
Unicharm’s aggressive marketing and aggressive pricing for pants, which was slightly below tape diapers, ensured that pants outpaced tape diapers. By the time diaper penetration had doubled to about 6%, pants diapers were the leading format so open diapers could not keep up with the pace. This means for most new users, the pants style diaper was the first diaper format they were exposed to. This is what entrenched the pants format in the consumer’s mind and hence in the market. Other Asia-Pacific markets like Bangladesh, Philippines and China are not like that. They do not have the 90% pants format penetration that India has.
My personal opinion though, as someone who has launched pants diapers in a market dominated by tape diapers, I think that any mother, presented by pants and tape diapers at more or less the same price, would take pants. I do not know the price differential for pants and diapers in those other markets but I would argue that it is a relevant factor. But that is a discussion for another day.
These two examples from emerging markets illustrate very clearly that entering emerging markets takes a certain level of conviction. You have to have conviction in your strategy in order for it to work. The other simpler term for it is courage. I may add that when Unicharm was building their factory in Egypt as the Arab spring swept across North African countries. But they stayed the course. When Hayat was constructing their $100 million factory in Nigeria, the currency devaluation, driven by low global oil prices, hit the economy so hard a number of businesses went under. In fact, around that time Wemy stopped manufacturing their baby diaper range, and started importing. Then they stopped baby diapers altogether, only to re-launch about three years later in 2019. But Hayat stayed the course. Investing in emerging markets requires conviction. More than any other markets.
So for players that want to take the decision that AfCFTA may not work and ignore it, the question that you want to ask yourself is this. What if it works? Are you prepared to be left behind in this market where more than half of the fastest growing economies on the globe are situated? Are you prepared to play second fiddle to your competitors who may have taken a different decision from yours?
Africa Continental Free Trade Area
Now back to Africa. How does a diaper manufacturer prepare for the Africa Free Trade Agreement? I have already said it and I will repeat it. You need conviction. I joke. But more seriously…I repeat this point because it is key.
I would look at this in two ways. Whether the diaper manufacturer is already operating in Africa or not. If yes, there are a number of things that current players in the region are already doing that put them in the position of readiness. For example, the model of manufacturing in one hub and taking the goods to several other markets within the region is already happening now anyway. The big multinationals are manufacturing in South Africa and exporting product to East Africa and in some cases West Africa, as well as other markets within SADC. The added advantage this time is that there will be no duties to pay and delays, where they were happening are likely to reduce. A no duties reality means that your product can land in the new markets cheaper than before, so the uptake and category penetration may improve from this point forth and it will mean better revenues, better margins and better business for you. Good reasons to step forward and consider AfCFTA rather than to stay on the side-lines.
In terms of packaging, the products of multinationals that are currently exporting are already compliant with labelling legislation in the various jurisdictions. French in Francophone markets and so on. Most products from South Africa have multi-lingual labelling anyway, from Portuguese, French, English, Arabic and sometimes even Spanish, Korean and Japanese. Some markets are more stringent than others. Take Nigeria, where one has to be registered with a government body called NAFDAC, the National Agency for Food and Drug Administration and Control. This is the government agency that is responsible for regulating and controlling the manufacture, importation, exportation, advertisement, distribution, sale and use of food, drugs, cosmetics, medical devices and chemicals.
Consumer goods being what they are, one needs the consumer numbers for the economies of scale and the higher the concentration of consumers in the same area, the better and easier it is to service them. That is why it is easier to service urban markets than rural far flung markets that are more scattered. That is why it is better to think of your African markets in terms of cities rather than countries. Think of what you will do in the sub-regions, North Africa, West Africa, East Africa, Southern and Central Africa. Next you want to think what you will do in the cities in those sub-regions. Forget the borders. Think cities. Think what you will do in the West African sub-region. In Lagos, Abuja, Accra, Abidjan and Dakar. For East Africa think Nairobi, Dar Es Salaam, Kampala, Kigali.
By approaching your markets this way, you are already halfway to being aligned with the AfCFTA model, which aims to remove borders. Win the cities and next you can think of how you will manage the smaller cities. They will be more difficult to service. But they will add some numbers to your base volume of the big cities.
You will also need someone at the executive level to be responsible for your AfCFTA project. If not at executive level, the designated head of the AfCFTA must be granted executive powers. The reason for this is because tough decisions will need to be made along the way and quickly, and if whoever is responsible for this project does not have the power to decide, the project will ultimately fall flat. The team will face some difficulties but above all they will learn. From this core team some champions will emerge. You want to use these to be the leaders of your regional projects. You want to deploy them to oversee the places where you are having bottlenecks.
For a new player in the African market, I would keep the cities approach in my launch strategy. I would start with the modern trade, which is the low hanging opportunity, because it is growing and also very familiar. Your key account management principles that you are used to apply here. You can run your loyalty programs and execute your promotional calendars with ease. This is familiar territory. Things change when you must now deal with the informal channel, which the bigger chunk of the business anyway. For this one, put on your learning hat. Be prepared to learn as you go. Think of it as parenting. That crucial role and probably one of the most important roles any human may have to perform. And yet for a task so huge and so crucial for the future the species, there is no school for it. You learn as you go. You make and correct your mistakes as you go. And yes… some mistakes you never get a chance to correct. Such is life. And such is business in Africa. Over-stated I know but do I make my point hit home?
It is probably easiest to work with distributors that already have a regional footprint. They will have the capacity to take your product far and wide. But it also means that they are already big and they may not be as hungry. And if their core revenue is coming from other categories, they may not be as hungry to build your business as you may want. This is where it may count to build your own capacity. Perhaps with a medium sized distributor whom you will support slowly and organically until they grow regionally. They will be hungrier to grow. You will be their bread and butter. In all that time mutual trust will be built. The trust element will count for a lot in future when you must co-invest and make bigger investments for the future of your mutual businesses. The distributor will learn more about the category with time. They will teach your team about the market dynamics, especially the informal channel, which may vary by region and by country. Those slight nuances can make or break your strategy. So there will be a lot to learn.
Handas Consulting, Johannesburg, South Africa
Africa’s disadvantage becomes an advantage. With the kind of challenges that the continent faces, it is easy to have the mindset that AfCFTA will not take off and instead either ignore it or adopt a wait and see position.
The interesting thing about Africa is that in a few cases its weaknesses and disadvantages of the past have worked out to be advantages today. Take the trend of the mobile phenomenon as an example. Africa had a lot of people that had been waiting in the queue for years to get a phone installed in their homes. This problem was solved with the emergence of mobile phones. The increase in mobile subscribers has created a disruption as projections for new mobile subscribers have been beaten every year for the past 10 years.
The only other product I can think of that attracted more users than expected was the electric toothbrush. I believe the inventor of the electric toothbrush had paraplegics in his mind as his target market. Then it turned out that a good number of able bodied people wanted to use the product too. An inventor’s delight! Can you imagine discovering that your market is actually bigger than what you thought by several multiples? That is comparable to what happened to Africa and the mobile phone.
Imagine a situation where you expected the uptake of your device to be from managers level upwards. And then in reality you realize that the uptake is from supervisor level upwards. There is a whole band of customers that you had not quite expected to be your customers but are. And for the level of convenience that mobile phones offered, companies issued them to their teams at a really fast pace too, adding to the rapid pace of mobile phone penetration in the region.
According to a UN report, Africa has 650 million mobile phones, higher than the number of cell phones in the U.S. or Europe. The report indicates that in some countries in Africa, more people have access to mobile phones than people who have access to clean water, a bank account or even electricity. Just to clarify, I am not saying that the scenario that I have just described is a good thing. The point that I am trying to make is that things just work differently in Africa sometimes where there are completely different market dynamics than in other areas. This is why the cut and paste models do not quite apply to Africa. This high number of cell phones is driven by a situation where too many people have been waiting for a service for so long when a disruptive solution does come, it is pretty much over-subscribed. And as a result, Africa has led the world in the solutions around mobile money today. Africa also has the of not being tied down by legacy banking mind-sets of old because the penetration for bank accounts was not very high in the first place, they are free to experiment in a sense. Therefore we have seen how well M-pesa has done as a payment solution for rural and urban businesses alike.
To take another example, also from an emerging market, and in our space this time, one can also observe what happened with the Indian diaper market. One school of thought concludes that Unicharm’s strategy to introduce pants style diapers in India was aided by several factors that prevailed at around the same time. When Unicharm launched pants format diapers in India, per capita household income was beginning to rise, as more women were beginning to join the workforce. Salaries were also increasing because the economy was doing well. Diaper penetration at that time was very low anyway at 3%, according to a Cyber Media Research.
Unicharm’s aggressive marketing and aggressive pricing for pants, which was slightly below tape diapers, ensured that pants outpaced tape diapers. By the time diaper penetration had doubled to about 6%, pants diapers were the leading format so open diapers could not keep up with the pace. This means for most new users, the pants style diaper was the first diaper format they were exposed to. This is what entrenched the pants format in the consumer’s mind and hence in the market. Other Asia-Pacific markets like Bangladesh, Philippines and China are not like that. They do not have the 90% pants format penetration that India has.
My personal opinion though, as someone who has launched pants diapers in a market dominated by tape diapers, I think that any mother, presented by pants and tape diapers at more or less the same price, would take pants. I do not know the price differential for pants and diapers in those other markets but I would argue that it is a relevant factor. But that is a discussion for another day.
These two examples from emerging markets illustrate very clearly that entering emerging markets takes a certain level of conviction. You have to have conviction in your strategy in order for it to work. The other simpler term for it is courage. I may add that when Unicharm was building their factory in Egypt as the Arab spring swept across North African countries. But they stayed the course. When Hayat was constructing their $100 million factory in Nigeria, the currency devaluation, driven by low global oil prices, hit the economy so hard a number of businesses went under. In fact, around that time Wemy stopped manufacturing their baby diaper range, and started importing. Then they stopped baby diapers altogether, only to re-launch about three years later in 2019. But Hayat stayed the course. Investing in emerging markets requires conviction. More than any other markets.
So for players that want to take the decision that AfCFTA may not work and ignore it, the question that you want to ask yourself is this. What if it works? Are you prepared to be left behind in this market where more than half of the fastest growing economies on the globe are situated? Are you prepared to play second fiddle to your competitors who may have taken a different decision from yours?
Africa Continental Free Trade Area
Now back to Africa. How does a diaper manufacturer prepare for the Africa Free Trade Agreement? I have already said it and I will repeat it. You need conviction. I joke. But more seriously…I repeat this point because it is key.
I would look at this in two ways. Whether the diaper manufacturer is already operating in Africa or not. If yes, there are a number of things that current players in the region are already doing that put them in the position of readiness. For example, the model of manufacturing in one hub and taking the goods to several other markets within the region is already happening now anyway. The big multinationals are manufacturing in South Africa and exporting product to East Africa and in some cases West Africa, as well as other markets within SADC. The added advantage this time is that there will be no duties to pay and delays, where they were happening are likely to reduce. A no duties reality means that your product can land in the new markets cheaper than before, so the uptake and category penetration may improve from this point forth and it will mean better revenues, better margins and better business for you. Good reasons to step forward and consider AfCFTA rather than to stay on the side-lines.
In terms of packaging, the products of multinationals that are currently exporting are already compliant with labelling legislation in the various jurisdictions. French in Francophone markets and so on. Most products from South Africa have multi-lingual labelling anyway, from Portuguese, French, English, Arabic and sometimes even Spanish, Korean and Japanese. Some markets are more stringent than others. Take Nigeria, where one has to be registered with a government body called NAFDAC, the National Agency for Food and Drug Administration and Control. This is the government agency that is responsible for regulating and controlling the manufacture, importation, exportation, advertisement, distribution, sale and use of food, drugs, cosmetics, medical devices and chemicals.
Consumer goods being what they are, one needs the consumer numbers for the economies of scale and the higher the concentration of consumers in the same area, the better and easier it is to service them. That is why it is easier to service urban markets than rural far flung markets that are more scattered. That is why it is better to think of your African markets in terms of cities rather than countries. Think of what you will do in the sub-regions, North Africa, West Africa, East Africa, Southern and Central Africa. Next you want to think what you will do in the cities in those sub-regions. Forget the borders. Think cities. Think what you will do in the West African sub-region. In Lagos, Abuja, Accra, Abidjan and Dakar. For East Africa think Nairobi, Dar Es Salaam, Kampala, Kigali.
By approaching your markets this way, you are already halfway to being aligned with the AfCFTA model, which aims to remove borders. Win the cities and next you can think of how you will manage the smaller cities. They will be more difficult to service. But they will add some numbers to your base volume of the big cities.
You will also need someone at the executive level to be responsible for your AfCFTA project. If not at executive level, the designated head of the AfCFTA must be granted executive powers. The reason for this is because tough decisions will need to be made along the way and quickly, and if whoever is responsible for this project does not have the power to decide, the project will ultimately fall flat. The team will face some difficulties but above all they will learn. From this core team some champions will emerge. You want to use these to be the leaders of your regional projects. You want to deploy them to oversee the places where you are having bottlenecks.
For a new player in the African market, I would keep the cities approach in my launch strategy. I would start with the modern trade, which is the low hanging opportunity, because it is growing and also very familiar. Your key account management principles that you are used to apply here. You can run your loyalty programs and execute your promotional calendars with ease. This is familiar territory. Things change when you must now deal with the informal channel, which the bigger chunk of the business anyway. For this one, put on your learning hat. Be prepared to learn as you go. Think of it as parenting. That crucial role and probably one of the most important roles any human may have to perform. And yet for a task so huge and so crucial for the future the species, there is no school for it. You learn as you go. You make and correct your mistakes as you go. And yes… some mistakes you never get a chance to correct. Such is life. And such is business in Africa. Over-stated I know but do I make my point hit home?
It is probably easiest to work with distributors that already have a regional footprint. They will have the capacity to take your product far and wide. But it also means that they are already big and they may not be as hungry. And if their core revenue is coming from other categories, they may not be as hungry to build your business as you may want. This is where it may count to build your own capacity. Perhaps with a medium sized distributor whom you will support slowly and organically until they grow regionally. They will be hungrier to grow. You will be their bread and butter. In all that time mutual trust will be built. The trust element will count for a lot in future when you must co-invest and make bigger investments for the future of your mutual businesses. The distributor will learn more about the category with time. They will teach your team about the market dynamics, especially the informal channel, which may vary by region and by country. Those slight nuances can make or break your strategy. So there will be a lot to learn.
