Ethiopian food company pursues vertical integration
SAMANU, the owner of the Tena brand of sunflower and soya bean oils in Ethiopia, is working towards vertically integrating its manufacturing activities. The company, majority owned by investors managed by private equity firm 54 Capital, recently secured a $21 million growth capital injection from Norwegian development finance institution Norfund and other private backers. The funding will be used to reduce its dependence on imported raw materials and take advantage of export opportunities.
Currently SAMANU imports raw sunflower oil, mostly from Eastern Europe, and refines and packages it locally. With the new investment, it will construct a solvent extraction plant that will allow it to produce raw oil from locally-grown sunflowers. In addition, the company will also extract oil from domestically-produced soya beans and sesame.
The company aims to secure a steady supply of raw materials by collaborating closely with smallholder farmers. To support this effort, Norfund plans to use grant funding to provide contracted farmers with inputs such as high-quality seeds, fertilisers and training to increase their productivity. The goal is for the business to rely entirely on locally-sourced resources within the next three years, according to Saad Aouad, the chief investment officer of 54 Capital.
SAMANU plans to sell its 100% locally-produced sunflower and soya bean oil primarily in the local market, while the higher-priced sesame oil will be mostly for export.
Every year, Ethiopia imports billions of dollars of goods that can theoretically be manufactured locally. Replacing these imported products with locally produced goods presents a significant opportunity for businesspeople and investors, Aouad told How we made it in Africa in an earlier interview.
Aouad is particularly upbeat about the manufacturing of basic products such as edible oils, pasta, dairy and generic pharmaceuticals. Despite rapid economic growth in recent years (Ethiopia averaged a GDP growth rate of over 8% in the past decade), incomes remain low and much of the population is unable to afford high-end goods. “We like sectors that are resilient and those sectors are the ones meeting the basic needs of the population,” he said.
But while the opportunity for increased local manufacturing is clear, achieving success as a factory boss is not so straightforward.
One of the biggest challenges is a shortage of foreign currency; ironically, this is largely because Ethiopia imports more than its exports. Many of the raw materials – such as agricultural produce – used by local manufacturers must be brought in from abroad. However, this is not possible if there isn’t enough available international currency to pay the foreign supplier.
The transport logistics of importing these raw materials is another obstacle for Ethiopian factories. The country is landlocked and depends on the port of Djibouti for much of its imports. However, the port is often congested, leading to delivery delays of vital factory inputs. To compensate for these delays, Ethiopian-based manufacturers need to import more raw materials than they require and this negatively impacts their cash flow. “It puts a lot of strain on your working capital because you might need to bring in big quantities and keep them onshore in Ethiopia,” Aouad said.
Transporting goods from Djibouti is also expensive. While the situation has improved with the construction of a new rail line between the port and Ethiopia’s capital Addis Ababa, it is sometimes difficult to find space on the train.
SAMANU’s domestic sourcing initiative aims to ensure a reliable supply of crops for its factory. However, for many Ethiopian manufacturers, sourcing raw materials locally is a challenge. Despite the favourable climate and ample arable land, the quality of produce grown by local farmers is often not suitable for food processing. For example, Ethiopia exports fresh tomatoes but imports ketchup due to the inadequate quality of locally grown tomatoes, making it difficult to run a profitable ketchup manufacturing operation. Similarly, the quality of locally produced wheat often doesn’t match the quality of imported varieties.
“There is a lot of things that need to be done in the agricultural sector so that you can actually export value-added products or use those raw materials for local production,” Aouad said, adding the country has to incentivise large commercial farming enterprises to invest in Ethiopia and transfer modern farming practices to local smallholders.
Aouad noted that some of these difficulties can be overcome with strong management teams. “You have a population of 100 million and very little manufacturing capability. So, if you can build those manufacturing capabilities and have a management team that can deal with these challenges … then Ethiopia becomes a very attractive destination.
“The opportunities are everywhere in the country. The most untapped opportunity for me is to use the available resources and grow high-quality agricultural produce that will drive the manufacturing sector.”