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Africa Market Entry: Strategies for consideration

By Grant Hatch, Pieter Becker and Michelle van Zyl

Table of contents
Introduction Unlocking Africas potential
Understanding the market opportunity Developing the right value proposition Crafting a market entry strategy Overcoming sourcing and procurement challenges Choosing the best manufacturing strategy Developing effective distribution Optimizing marketing and promotion

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6 8 9 11 12 13 14

Conclusion

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2 | Africa Market Entry: Strategies for consideration

Introduction
Companies searching for new emerging market growth opportunities should not overlook Africa. While the continents sheer size would merit attention, Africa offers much more than real estate alone: Since 2000, Sub-Saharan Africa has experienced consumer spending growth of 4 percent per year, which propelled it to $600 billion in 2010.

Rapidly improving income levels, infrastructure, and business environments promise to drive continued growth in Africas consumer markets. In fact, consumer spending is expected to reach nearly $1 trillion in 2020, according to a 2011 Euromonitor report. However, most companies need to adjust their strategies and expectations when entering the continent. Logistics can be unreliable and infrastructure readiness lags behind much of the developed world. As a result, fully understanding a companys potential

opportunities on the continent can be challenging. Executives intrigued by the prospects of competing in Africa need solid advice on why the regions consumers are attractive, which segments they should focus on, and how they can capture the markets potential most effectively. In this article, Accenture presents concrete steps and recommendations leaders can use to tailor their strategies to the challenges and opportunities they will encounter on the African continent.

Unlocking Africas potential


A companys market entry plan must clearly reflect the role Africa will play in its broader corporate strategy, and focus on which countries it makes sense to enter, in what sequence, and with what timing.

Figure 1. Seven key market entry steps

Strategy
1. Market opportunity 2. Value proposition 3. Market entry strategy
How do we enter the market with minimal risk?

Execution
4. Sourcing 5. Manufacturing 6. Distribution 7. Marketing and promotion
How do we ensure that there is demand for our prodcut/ service?

Do we understand our target market?

Do we have the right product/ services to offer?

Do we source locally or import?

If we produce locally, do we use local manufacturers or do we build capacity?

How do we deliver our products or services to our customers?

Key Questions
What influences the African consumers purchasing choice? What do they buy? Where do they buy? How do they buy? When do they buy?

Companies can use a simple framework to execute this entry strategy effectively, regardless of the markets or segments on which they choose to focus. As shown in Figure 1, the framework encompasses the full lifecycle of doing business in Africa, from gaining insights on the biggest opportunities to deploying effective marketing campaigns that support the companys offers.

Understanding the market opportunity


The first step toward participating in the African opportunity mandates that companies develop a deep understanding of the market, the competitors they will face, and the consumers they will serve.

For example, while the continents wealth of natural resources will undoubtedly continue to be important, the most significant contributors to market growth are changing, with less reliance on exports and more reliance on domestic demand in the form of consumer spending and imports. Despite currently low per-capita income levels in Africa, average wages are growing, giving rise to an emerging middle class that will become more demanding as income levels and spending increase. This rapid and sustained rise in consumer spending results from three key forces: A population forecast to reach almost 2 billion by 2050.1 In 2005, Africa had an estimated population of more than 920 million, which increased to an estimated 1 billion in 2010. By 2050 the population is expected to increase to almost 2 billion. Furthermore, between 2010

4 | Africa Market Entry: Strategies for consideration

and 2050, Africas active/working age population will grow from 56 percent of the continent to 66 percenta striking contrast to more mature continents whose populations are aging and moving into the dependent category (i.e., 65 years or older).2 Expansion of the economically active population will lead to increased demand for goods and services. Significant decrease in poverty.3 By 2020, Accenture estimates that poverty levels in Africa will fall to 20 percent of the population from nearly 45 percent in the 1980s. Poverty fell for both landlocked and coastal countries; for mineral-rich and mineral-poor states; for countries with favourable or with unfavourable agricultural resources; and for all nations regardless of colonial origin. In fact, GDP in Africa is growing even faster than the continents meteoric rise in population.4

Rapid urbanization. Africas growing and increasingly wealthy population is becoming more urbanized as well. By 2050 almost two-thirds of the population will live in cities, compared with 40 percent in 2010.5 Urbanization, in turn, will lead some African consumers to purchase more goods and services, and will make it easier for companies to reach consumers with products, services, and communications. Rapid growth in population and urbanization will also place additional constraints on the Africas infrastructure requirements, mandating greater levels of planning and urban investment from public and private sector players alike. Furthermore, three key trends are allowing consumers to buy more and enabling companies to reach them more effectively:

Improving access to consumers via mobile technologies. Consumers in Africa are becoming easier to reach due to a remarkable uptake of mobile services: By 2012 almost 50 percent of Africans (more than 500 million people) will own a mobile phone, compared with 30 percent in 2008.6 This significant mobile adoption by consumers has made it easier for companies to reach them through mobile marketing campaigns, contests and promotions. Furthermore, consumers are more savvy because they are now linked to the rest of the world through their cell phones and no longer isolated. In addition to improving access to consumers, the mobile revolution has created a booming industry that employs and provides income for hundreds of thousands of people. One example of this is the significant drive in Kenya to open new business call centres.

A healthier and more stable business environment. Fewer conflicts, more democratic elections, higher economic growth rates and improved business regulation make Africa more business-friendly every year. This fact has been recognized by the World Banks 2009 Ease of Doing Business report, which highlighted Africa as a continent that is making strides toward becoming a businessfriendly regulatory environment. A loosening of trade restrictions. Trade among African countries in the past has been slowed by the hefty tariff barriers that countries impose on imports. However, the global drive for the rapid opening of borders to regional and international trade is forcing African countries to open up their borders for imports. Africa has fostered a number of formalized trade blocs that have been the catalyst for loosening trade restrictions between member states and the global economy in general.

While this development bode well for African market entry, companies need to be aware of potential pitfalls. For example, because Africa has a large informal economy with a prevalence of cash transactions, accurate, representative data on consumer spending is sparse. But firms can bridge this gap by creatively tapping into local networks to gather insights, partnering with academia and companies that possess usable customer data (e.g., banks and telecommunications providers), and by designing market-facing pilot experiments that feature risk mitigation mechanisms. Companies also need to be prepared literally to walk the markets and gain insights from talking to street vendors and observing consumers. They can thus build a qualitative model of how each market operatesa necessary but very different approach to that used to understand developed markets, which primarily relies on analyzing large volumes of quantifiable data.

CfC Stanbic, a division of Johannesburgbased Standard Bank Group, provides an example of how this is done. One of the key aspects of doing business in Africa is the predominance of individual, self-employed vendors: Nairobi alone, for instance, has approximately 100,000 such businesses. For banks such as CfC Stanbic, the challenge is loaning money to the most promising of these entrepreneurs, many of whom have little or no credit history. To tap into this opportunity while reducing its loan default risk, CfC Stanbic used a tool that enabled portable psychometric testing of potential loan recipients, rapidly assessing their risk tolerance, ethics and honesty, intelligence, and business skills. CfC Stanbic also deployed a mobile workforce to complement its local banking branches, and further mitigated risk by using seed loans with graduation plans, which allowed the banks business with a given customer to grow as the customers credibility was established.7

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Developing the right value proposition


Once they understand the market, leaders need to create a differentiated, attractive offering that takes into account the special nature of African markets. For instance, because of lower income levels, price remains the key consideration for the majority of African consumersa reality all offerings must reflect. In addition, community and family are strong elements of African culture, and companies need to make sure their branding and promotional efforts resonate with these values. Potential initiatives could include introducing corporate social responsibility and sustainable development programs that position the firm as something more than just another shopping choice. Consumer goods giants such as Unilever and P&G have excelled at understanding and meeting the unique needs of

African consumers. Unilever, which aims to serve all African consumers (including those living on less than $1 each day), had to find a profitable way to make its products available and affordable for the poorest Africans. To achieve this goal, the company created the small unit packs/low unit price concept, which involves selling much smaller than usual packets of detergent or salt. This strategy has allowed Unilever to reach the volumes required to support expansion while capturing the loyalty of lower-income customers. It has also prevented the margin-eroding resale of its bulk products in smaller portions. Unilever collaborates closely with local wholesalers who not only help the company to supply Africas informal market but also provide it with market insights and customer feedback. Unilever has embedded corporate social responsibility in its strategy to further boost the brands relevance with Africans.8

Key Questions
Should we have a distinctive value proposition or simply follow our competitors? Which aspects of our value proposition will be distinctive (price, product, place, promotion)? Do we offer a distinctive value proposition for each consumer segment or follow a broad approach to all segments? Is our value proposition economically viable?

Key Questions
Does the market entry strategy align with global/regional guidelines? What is your level of risk/ reward propensity? How quickly do you want to scale up in the target country (incremental versus big bang)? What degree of local knowledge, skills and networks are needed?

Crafting a market entry strategy


While Africa has shown tremendous improvements as a consumer market, many barriers to entry still remain. Corruption is a ongoing concern, for example, as are the lack of infrastructure and local talent, burdensome regulations and bureaucracy. To choose the right strategy for overcoming these hurdles, leaders must assess risks and then decide whether to establish a standalone business, enter via an acquisition, seek partnerships and joint ventures, or participate by licensing the firms products and services to another company. Each approach has its pros and cons. Entering via a greenfield investment (i.e., going it alone) can result in the biggest payoff if successful, but presents the riskiest choice for companies that

lack local market knowledge, access to distribution channels or political connections. Conversely, while entering Africa via an acquisition can be expensive and time consuming, it can also provide immediate access to existing networks and distribution channels and the opportunity to gain deep local market insights that companies can scale up to address other markets. Partnering provides a faster way of gaining access to local market knowledge and distribution channels, but selecting the right partner requires a careful appraisal of ownership, control, pricing and local partner capabilities. Licensing offers the least risky and lowest-cost option to expand market reach, but carries a high brand risk and limits the potential to exploit local market opportunities.

Key Questions
What is the cost and benefit of sourcing locally versus importing? Is the required raw material available in the target country? Are substitute raw materials available in the local target country? What degree of local investment (skills & financial) is required to integrated local suppliers into your value chain?

Overcoming sourcing and procurement challenges


Companies have to develop a stable, cost-effective supply chain that enables them to meet local needs and overcome local challengesall while maintaining profitability. No small feat, since importing raw materials or finished goods into Africa is hampered by many of the same hurdles that make market entry difficult, including corruption, complex regulations, high taxes, and substantial import fees. Furthermore, Africas roads and basic infrastructure are often poor, which increases the cost of distribution, while its ports are often congested and inefficient.

To overcome these barriers, companies need sourcing partners with strong links to the community and high levels of intelligence regarding local preferences and issues. They also need to invest in the capacity and capabilities of these partners, establishing training and incentive programs that enable them to fulfill the companys brand promise. Global brewing giant, SABMiller has been able to overcome the challenges of sourcing in Africa by setting up cooperatives with local farmers to supply barley and cassava to suit the tastes of different consumer segments. SAB Miller has also signed long-term contracts to buy crates from a local producer, as well as locally produced cans. By 2012, the company hopes to source from and work with up to 45,000 African farmers.9

8 | Africa Market Entry: Strategies for consideration

Key Questions
Is there a cost advantage of producing products locally? Is local skills and capacity available to produce your products? What level of investment is required to produce products locally at the required global quality standards? Is there a strategic logistics benefit of setting up a manufacturing capability (e.g., setting up in Kenya to service other East African markets)?

Choosing the best manufacturing strategy


In addition to solving sourcing problems, a company must develop a robust and relevant manufacturing strategy. Such a strategy should either feature strong partnerships with local producers or focus on the development of in-house manufacturing capacity close to a companys target markets. While the right manufacturing strategy should be specific to each companys context, capabilities, and goals, a few general guidelines can nonetheless be useful. For instance, companies doing business in Africa should act to improve the stability of key resources by introducing term contracts, making upstream acquisitions to lock in supply, and investing in diversified geographical sources to minimize disruptions. Building trust-based relationships with local producers is also important, as is the provision of technical support and training to local manufacturers to ensure high standards for locally sourced raw materials.

DUFIL, the largest manufacturer of instant noodles in Nigeria, provides an example of how foreign brands can be manufactured successfully in Africa. Its Indomie brand, originally an Indonesian brand of instant noodles, has been a runaway hit in Africa, and in Nigeria in particular. In 2008, the company introduced a new flavor tailored to local tastes, which became very popular among Nigerian consumers. However, challenges related to importing key ingredients made it difficult for the company to meet demand for this new product. To overcome these challenges, Indomie embarked upon a backward-integration strategy. The company invested in world-class local production facilities and tapped local sources and its own manufacturing capabilities to source raw materials. Today, the brand is being produced in nine ultra-modern factories in two key locations in Nigeria, with plans to expand aggressively. Because of its ability to respond quickly to local demand, Indomie has captured 70 percent of the Nigerian instant noodle market.10

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Developing effective distribution


Given that more than 60 percent of Africans live in rural areas and have limited access to transportation, simply reaching the final consumer can be extremely costly and difficult. Poor roads and limited infrastructure can make delivering products or services to consumers a daunting task. As a result, companies should build strong sales and distribution networks by leveraging a mix of third party, wholesale, and direct-distribution models. Companies can effectively reach rural consumer segments by employing local residents to act as agents, or by partnering with local organizations with links to rural markets.

Mobile operator MTN is a seasoned veteran of doing business with rural African consumers, with operations in 21 markets across Africa and the Middle East (plus Afghanistan). To boost its market share among rural, low-income Africans, MTN has created services tailored to their needs through a network of local agents, established kiosks in rural areas, and has given agents motorbikes to reach the most remote areas. MTN has also developed lower denominations when selling airtime, reflecting the low and unpredictable income of many African consumers. Because of these kinds of innovative distribution and promotional activities, MTN has captured a significant portion of Africas low-income consumer segments, which represent crucial market entry points.11

Key Questions
What are the main consumer purchase points (e.g., open-air markets, public transport hubs, rural towns etc.)? What is the frequency of consumer purchases at these points? Are there existing distribution networks that service the main consumer purchase points? What is the best distribution method to reach consumers where existing networks dont exist (e.g., trucks, local agents, etc.)?

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Key Questions
What are the available marketing channels in country? What is the preferred marketing channel for each target segment (e.g., TV vs. radio)? What level of education (i.e., practical use and benefit of product) is required in communications materials? Do the product/service marketing take into account community endorsements (e.g., use of local community celebrities)?

Optimizing marketing and promotion


Companies accustomed to stimulating demand through Western-style marketing and promotional approaches will have to rethink their go-to-market strategies for the African market. The majority of African consumers buy from informal street vendors and kiosks, and they often make purchases in a more erratic, ad-hoc pattern than Western consumers. Furthermore, traditional media such as television and radio, do not always reach these masses, particularly those living in rural areas or urban slums. In much of Africa, weak infrastructure limits access to media, whether TV, websites, or social media, making such interactions comparatively rare events.

As a result, companies should identify strong local partners to help them access informal markets and obtain the information they can use to refine their offerings and messages. They should spend their marketing budgets wisely, being mindful that TV, radio and print campaigns will not have the same impact that they would in developed markets. In particular, when attempting to reach lower-income segments, companies need to ensure that their promotions and marketing efforts are focused on the community, and are visible in the market through relevant media and campaigns such as radio and contests, respectively.

12 | Africa Market Entry: Strategies for consideration

East African Breweries Limited (EABL) has employed a tailored marketing approach to become East Africas leading branded alcohol beverage company. While younger consumers initially perceived its Tusker Lager beer as old-fashioned, EABL turned this perception around to the point that it became the biggest brand in East Africa. The company had a limited marketing budget, and knew that the impact of traditional TV- or radiobased advertising would be limited within East Africa. So, to maximize the return on its marketing resources, EABL focused on a single, high-impact platform that would resonate with younger consumers: Tusker Project Fame, a reality show focused on regional talent. To overcome limited

access to TVs, EABL sponsored viewing bars where the show was screened in conjunction with promotions on EABL drinks. It also held contests to boost audience engagement. EABL provided training and branded material to retailers to ensure that the brand was delivered successfully to target consumers. It also leveraged mobile and Internet technology: the company generated more than 1 million SMS votes and Web traffic of approximately 70,000 hits per week.12

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Conclusion
As the African opportunity grows more attractive, companies are devising creative ways to gather the market insights they need to craft compelling consumer offers that can both meet the needs of African consumers and generate robust revenue and profits. Experience shows that successful organizations employ a structured approach to understanding and doing business with the African consumer. By focusing on the distinctive needs, behaviors, and preferences of consumer segments and by applying a systematic approach to market entry and ongoing success, firms can capture the African opportunity on their own terms, in the process ensuring long-term profitable growth.

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References
1 UN Population Division, 2010 2 UN Population Division, 2010 3 Maxim Pinkovskiy, Massachusetts Institute of Technology Xavier Salai-Martin, Columbia University and NBER, 2010 4 Maxim Pinkovskiy, Massachusetts Institute of Technology Xavier Salai-Martin, Columbia University and NBER, 2010 5 UN Population Division, 2010 6 Africa Mobile Fact book, 2008 7 Source: Standard Bank Group Kenya SME Pilot. www.hks.harvard.edu/ var/ezp_site/storage/fckeditor/file/ pdfs/centers-programs/centers/cid/el/ gem-2010/presentations/Standard_ Bank_Group_SME_Pilot.pdf 8 Source: No whitewash: Unilevers drive to dominate Africa, Jasson Nissa, April 2003 9 Source: African group brews new customers, http://www.ft.com/cms/ s/0/c55f7318-f957-11de-80dc00144feab49a.html#axzz1En8JK3ob 10 Source: Noodles War: Indomie and the competitions, stocknewsline, December 2009 11 Source: Distribution is the name of the game, Mats Thoren, Ericson Business Review, February 2007 12 Source: EABL Annual Report, 2010

About the authors


Grant Hatch is a senior executive in the Strategy service line in South Africa and is responsible for building its profile as a thought leader in the South African marketplace. Grant also leads the products management consulting business in South Africa, which includes a focus on retail, consumer goods and services, automotive, industrial, travel and transport sectors. Grant is an experienced strategy consultant and business leader with highly developed analytical and team leadership skills. He has a strong financial analysis background and a demonstrated ability to build relationships and deliver strategy at executive level. He has managed strategy assignments across a range of industries including financial services, mobile telecoms, telecoms infrastructure, fast moving consumer goods, pharmaceuticals, electricity distribution, agro-processing and diamond mining. grant.hatch@accenture.com Pieter Becker is a consultant in the Strategy service line and part of the Africa Strategy Team, focusing on growth strategy and execution in the products industry group. Pieter has worked in various countries across Sub-Saharan Africa to assist clients to expand their operations and reach in Africa. Pieter has been with Accenture for more than 3 years and is based in Johannesburg. pieter.j.becker@accenture.com Michelle van Zyl is a manager in the Strategy service line and part of the Africa Strategy Team, focusing on corporate strategy in the products industry group. Michelle has primarily focussed on developing client relationships within East Africa, and has assisted a number of clients to improve top line growth. Michelle has been with Accenture for more than 3 years and is based in Johannesburg. m.van.zyl@accenture.com

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