Navigating Africa: 17 lessons from the ground

  

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Africa’s strong growth over the past 10 years has renewed investor interest in the continent, but competition, difficulties finding the right deals and closing transactions continue to pose real challenges for investors. Eliot Pence, from the Whitaker Group, a sub-Saharan Africa-focused corporate strategy consultancy, shares insights on operating and investing on the continent.

Eliot Pence

1. Beware of pan-African business models – Businesses are often over-optimistic on the ease of expansion across markets in Africa. There remain significant formal and infrastructural barriers. For example, a truck driving between Abidjan and Lagos will experience on average 46 checkpoints. In addition, there are significant trade barriers in Africa; the International Monetary Fund has noted that average tariffs in Africa are still significantly higher than in the rest of the world. Despite clear economic benefits – a World Bank study estimated that a 20% reduction in border crossing time alone would generate 15% savings in transport prices – regional economic communities have not gone as far as expected in easing cross-border business linkages.

2. Get the “small” picture – Understanding the “the big picture” data points like GDP growth is necessary, but not sufficient in assessing an investment’s potential. Investment portfolios can easily become dependent on a single city or state, such as Lagos, which has a GDP of US$34 billion – bigger in itself than most other African countries. Controlling the risks implied by this kind of dependence requires understanding the situation on the ground, such as parliamentary and state politics, in addition to the forces driving the regional markets’ growth.

3. Understand the street-corner competition – The biggest competitor of an international retail company is most likely a collective of small, informal enterprises. These small firms might not show up in a regular desk analysis, but they often make up the lion’s share of the retail sector. Some estimates suggest the market share of mom-and-pop stores in retail in Africa might be as high as 85%. But those numbers differ substantially across countries – Nigeria has six shopping malls, whereas South Africa has over 200. Cross referencing retail space with population density, as Avon and Mary Kay do when entering new markets, can provide a rough estimate of the dominance of the local informal consumer goods market.

4. Toe-dipping – Companies entering Africa should do so gradually. Pilot projects can help refine the business case and entry strategy while limiting expenditure and exposure. Pilots also provide an opportunity to “stress test” risks, policies, partners and local competition. They can uncover unique opportunities, such as local sourcing options and public-private partnerships.

5. Find partners that fit – Partners are integral to success in sub-Saharan Africa. Apart from being required for foreign firms to operate in some markets, partners bring local knowledge and understanding. Companies often look to work with a local company that is part of a bigger domestic group, seeing the presence of a larger business as a confidence measure. But partnering with holding companies or large domestic conglomerates can be problematic, especially if the parent company competes with the foreign investor for clients. Looking at companies listed by local chambers of commerce or firms vetted by development finance institutions can help narrow the field. Companies that interact strategically with these entities may also find opportunities for public-private or donor-private partnerships.

6. Customise investment structures – Equity can be difficult to structure in Africa because of the underdeveloped legal and regulatory environment and the relative lack of familiarity with financing models. Mezzanine financing is often easier to structure. For example, quasi-equity (e.g. royalties based on revenue) is, by being closer to the heart of most businesses, easier to monitor and structure, and can be useful across a range of industries that produce tangible outputs. The SME fund Business Partners has successfully applied this model throughout sub-Saharan Africa.

7. Expect a lengthy due diligence and deal-making process – Differences in reporting requirements and accounting standards, the absence of credit bureaus as well as the general inaccessibility of public information, can complicate deal-making. The process of finding a potential acquisition candidate, conducting due diligence, and preparing the purchase can easily take more than a year. With the introduction of the UK Bribery Act and renewed focus on prosecuting FCPA violators, companies need to take an even finer comb through their partner’s books (if they have them).

8. Global brands vs. local business models – Surveys tend to inflate consumer knowledge of global brands and can give false confidence to companies playing on global brand equity when entering African markets. More important is how a company can leverage its global research capacity and best practices by applying them locally. SABMiller has grown from its African roots to become one of the world’s largest brewing companies through careful examination of local conditions. Their success lies in a business model that emphasises local products and brands. Eagle Lager, the company’s Uganda brew, is made exclusively with locally produced raw ingredients, qualifying it for lower excise tax rates and allowing the company to sell its product for one-third less than the competition.

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