Every year, sub-Saharan Africa imports billions of dollars of food products that can be produced locally utilising the continent’s abundant agricultural resources. The supply chain disruptions as a result of Covid-19 highlighted the need for the continent to be less dependent on imports for its food requirements. In addition, weakening African currencies and a shortage of US dollars in some countries have made substituting foreign imports with domestic production more attractive. Despite the opportunities, running a successful agribusiness venture involves many potential hurdles, including unreliable raw material supply, financing constraints and foreign exchange headwinds. Jaco Maritz examines the continent’s import substitution prospects and challenges from the perspective of investors and entrepreneurs on the ground.
Ethiopia, Africa’s second most populous state, is heavily reliant on imports for value added food products. While the country is a net exporter of agricultural produce, these are mostly unprocessed commodities. The manufacturing sector has grown significantly in recent decades but its share of GDP was just 7.4% in 2019, well below the African average and far from the government’s goal of 17%. Replacing these imported products with locally produced goods presents a significant opportunity for businesspeople and investors, according to Saad Aouad, chief investment officer of 54 Capital, an investment firm with interests in several consumer goods businesses in Ethiopia. He is particularly upbeat about the manufacturing of basic food items such as edible oils, pasta and dairy. Despite rapid economic growth in recent years – Ethiopia’s economy expanded at an average annual rate of 8.7% from 2012 to 2021 – incomes remain low and much of the population cannot afford high-end goods. “We like sectors that are resilient and those sectors are the ones meeting the basic needs of the population,” he says. (Read more: Ethiopia has significant potential for import substitution but success is not that straightforward)
Ethiopia has plenty of low-cost labour, an abundance of natural resources and sufficient power-generation capacity. However, aspiring factory bosses can expect to encounter a host of hurdles, including low labour productivity, difficulty in accessing land owing to a lack of co-ordination between federal and regional governments, and power interruptions; familiar obstacles in many African countries.
Likewise, Nigeria annually imports about US$8 billion worth of food and agricultural products – including wheat, fish, brown sugar, food ingredients and consumer oriented foods – many that can be produced domestically. Danladi Verheijen, managing partner of private equity firm Verod Capital, highlights the import substitution of fish as a substantial opportunity, pointing to villages in Norway where the entire economy is based on growing a particular type of fish (stockfish) sold to Nigeria. Trawlers from Southeast Asia also fish in the waters outside Lagos and Accra, process it in their countries and then sell it back into Africa. To capitalise on this, Verod has invested in fish-farming business Shaldag. “It grows fish at over 40 times the density of other local farms by using modern technology in their operations. The company produces processed, smoked catfish under the Shaldag brand. Nigeria imports over $600 million of fish a year, so this investment is an import substitution play,” Verheijin explains. (Read more: From fish to pharmaceuticals, investor bullish about import substitution in Nigeria)
In Zambia, Tue Nyboe Andersen, managing director of Lusaka-based Kukula Capital, sees potential for niche food products with minimal competition. The southern African country has limited food processing and many items are imported. As a landlocked country, Zambia has some built-in import barriers; imported items must be transported over long distances, presenting an advantage to local producers. Andersen highlights a company called Meraki that makes cakes and supplies them to big retailers like Shoprite. It has grown rapidly with decent margins because its competition is imported products that are significantly more expensive. (Read more: Investor highlights promising business opportunities)
Ghanaian agribusiness company Maphlix has also tapped into the country’s significant agricultural possibilities to replace imports. One of its biggest domestic customers is fast-food chain KFC, which it supplies with tomatoes, lettuce and cabbage. “Our country spends $300 million annually to import tomatoes. Our goal is to claim at least 40% of this local production gap,” reveals managing director Felix Kamassah. Another crop that sells well locally is carrots. “Again, the country has to import it, so there is another opportunity.” In certain categories, African producers will struggle to compete with cheap imports. (Read more: Farming business supplies KFC and exports to Europe)
In the case of chicken, Henri de Villeneuve, CEO of COBASA Business Advisory, warns against producing chicken for the domestic market close to the ocean because it could be impacted by imports from Brazil and elsewhere. Instead, poultry operations should be set up away from the coast as high inland transport costs create a barrier to entry for competitors. (Read more: Agribusiness prospects in East and Southern Africa: Investor shares his insights)
Beyond utilising Africa’s agricultural potential to produce food items, import substitution prospects extend to using crops to make industrial products. In 2021, Uganda-based Pura Organic Agro Tech Ltd raised $2.5 million to set up a vertically integrated cassava processing plant for manufacturing tapioca starch. This is used as an adhesive for soft boards and corrugated cardboard boxes as well as for house partitions and wardrobe fittings. The East African region imports almost its entire starch demand from India and Thailand. Pura Organic targets medium- to large-scale industrial companies that manufacture corrugated cardboard and soft boards for construction, which have expressed a preference to use locally sourced starch because of price and availability. It will enable them to procure smaller quantities at a time, freeing up cash flow. (Read more: Industrialisation of cassava in East Africa – Investor identifies gaps in the market)
Those able to establish successful local ventures could also grow their market by exporting to neighbouring countries, particularly as the African Continental Free Trade Area gains traction. Jean-Marc Savi de Tové, co-founder of Adiwale Partners, gives the example of a company in Côte d’Ivoire that manufactures soap from crude palm oil. With a competitively priced product, the business became a dominant player and grew its footprint regionally. Today, it generates substantial revenues by selling its soap beyond Côte d’Ivoire in countries such as Mali, Senegal and Togo. (Read more: Opportunities in French-speaking West Africa – insights from private equity investor)
Ensuring sufficient supply of raw material
54 Capital’s Aouad says the quality of Ethiopia’s agricultural produce is often not ideal for food processing and another reason why so many goods are still imported. “I will give you the example of tomatoes. Ethiopia exports fresh tomatoes but then imports ketchup. That doesn’t make sense because ketchup is relatively easy to produce. So why then? It is because the quality of tomatoes grown in Ethiopia is not good enough to run a profitable ketchup plant,” he explains.
The farming sector requires intervention to ensure an adequate supply of crops for agri-processing activities. “Ethiopia needs to invite large international farming companies to come to the country and set up commercial farms with modern methods of irrigation and fertilising. This international experience needs to be shared with local smallholder farmers situated around the commercial farms. The produce can then be sold to agri-processors in the city,” says Aouad.
Jerry Parkes, managing director of Ghana-based private equity firm Injaro Investments, also cautions against setting up capex-heavy agri-processing businesses if the supply of raw materials is not guaranteed. “One idea that has come across our desk many times is the production of canned tomatoes or tomato puree. People assume it would be a good business because fresh tomatoes are so ubiquitous and hyper-visible following bumper harvests. However, in many cases, the tomatoes grown locally are the wrong varieties, and yields are maybe a fiftieth or even a hundredth of the yields of competitors in China, the Netherlands or Italy. The processing facilities would require a huge amount of capital, but the supply of tomatoes themselves is not assured.” (Read more: Ghanaian investor talks opportunities in agriculture and beyond)
Nigerian tomato paste producer Tomato Jos has overcome these raw material challenges through vertical integration, a strategy whereby a company owns its supply chain or parts thereof. Tomato Jos spent five years perfecting its farming operations before it invested in a processing facility.
According to CEO Mira Mehta, a successful tomato-processing business requires a consistent supply of tomatoes of sufficient quality and at the right cost. If a factory doesn’t have an adequate tomato supply, it won’t be profitable, particularly in Nigeria where energy outlays are high. “If your capacity utilisation drops below 80%, your cost per tonne of production will balloon up, and you won’t be able to make money from your finished product,” Mehta explains. “Instead of making paste one batch at a time, you need to constantly feed raw materials into your factory, every hour of every day, to spread the huge energy costs over as high a volume of finished product as possible.”
Tomato yields in Nigeria are much lower than the world average: 5.47 tonnes per hectare, compared to a global average of 38.1 tonnes. Tomato Jos therefore had to put in considerable effort to improve the yields of its smallholder suppliers. “They actually had to farm themselves to prove that you can achieve those yields, and then start working with farmers to show them how they can grow crops in order to achieve those yields,” explains Euler Bropleh, managing director of VestedWorld, one of Tomato Jos’ investors. Only once Tomato Jos felt comfortable with the high-quality supply, did it build its factory, which officially opened in 2021.
Bropleh mentions one of Tomato Jos’ competitors that constructed a tomato paste factory without ensuring it had access to adequate raw materials to feed the facility: “They thought they could buy those raw materials from farmers when they harvested it. Come harvest time, the price of tomatoes was higher than they were willing to pay. They couldn’t get access to all the raw materials they needed.” (Read more: Producing tomato paste in Nigeria – Tomato Jos’ seven-year journey)
Facing financial constraints
In the Republic of Congo, Michel Djombo – founder of agribusiness company GTC – sees significant possibilities for the import substitution of palm oil, used for cooking throughout central and west Africa. He believes extensive market research is unnecessary: Congo’s official customs data already shows the large volumes of oil currently brought in from as far afield as Malaysia as well as the prices at which the commodity is imported. Should potential investors want to know the yields that oil palm trees in Congo can deliver, they can visit small and medium enterprises (SMEs) already growing in the crop. According to Djombo, the Congolese market can absorb a few hundred thousand tonnes of palm oil annually. (Read more: Mango, maize and palm oil – opportunities in Congo’s agriculture sector)
One of the reasons why the local palm oil industry is underdeveloped is lack of financing. Djombo says it is difficult to obtain medium- to long-term loans for agriculture in Congo. A palm tree typically takes four years to bear fruit, but most businesses will struggle to get a loan for more than two years from a commercial bank.
A study by the Commercial Agriculture for Smallholders and Agribusiness programme, published in March 2022, estimates that 83% of the financing needs of agricultural SMEs in Africa go unmet, the equivalent of $74.5 billion per year. Local commercial banks usually extend financing only to more mature farming businesses such as established aggregators and local processors, like maize or rice millers, serving regional or national markets. However, these are typically high-interest shortto medium-term loans with strong collateral and covenant requirements.
Foreign exchange headwinds
Even when African food processors add value to local crops, many typically still need to import some of the materials required in the production process. For instance, bread producers in Nigeria import yeast while many Malawian food processors bring in packaging material. The depreciation of African currencies against the US dollar is a struggle for companies as items are typically priced in US dollars. The situation is exacerbated by a general shortage of US dollars in countries such as Nigeria, Ethiopia and Zimbabwe.
“The biggest problem we have [in Ethiopia] is the availability of hard currency which is necessary for buying inputs for production,” says David Owino, founding partner of private equity firm Ascent Capital Africa. “The government has been making significant investments in infrastructure, which requires a lot of hard currency but the negative effect of this has been the crowding out of the private sector.”
He explains Ascent’s portfolio companies in Ethiopia have learnt to manage their forex carefully. “When you receive an allocation of hard currency, you need to buy as many inputs as possible, so that even if the next allocation is delayed, you have what you need to maintain operations. As a result, businesses in Ethiopia tend to invest a lot more in working capital, which is something you wouldn’t typically see in a country such as Kenya. For example, for a similar business operating in Kenya, we’d keep stocks for one and a half months, whereas in Ethiopia we’d keep input stocks for six months. So you need to be more cautious and increase your investment in working capital.” (Read more: Ethiopia – first-mover advantage for investors with long-term outlook)
Foreign exchange availability, combined with currency depreciation, is currently the number one challenge in Nigeria, according to Thessa Bagu, managing director of market entry and advisory company Naijalink Ltd. “It is difficult for both small and big companies, and there is no immediate end in sight. We had the same thing happen in 2015/2016; you couldn’t withdraw more than $700, no matter how much you had in the bank. That lasted a few months. This time it’s lasting much longer.
“The shortage of dollars is because of structural economic weaknesses that have only gotten worse. Essentially, Nigeria depends on the oil industry to earn US dollars. However, we’ve been producing less oil recently. Even if Nigeria produces enough oil, the dollar revenue is not enough to pay for all the other imports, so dollars remain in high demand but low supply,” Bagu adds. (Read more: Business in Nigeria – forex hurdles, selling consumer goods and how the country has changed)
Africa should be self-sufficient in several categories
Frozen baked goods and vegetables are just some of the products for which Steven Carlyon, president of SimpliFine Foods, sees potential in Kenya. He highlights the hospitality industry that imports large volumes of frozen baked goods – such as bread and croissants – from Europe and the Middle East because there are hardly any local companies producing frozen baked items of consistent quality on a large scale. Hotels in Kenya are increasingly outsourcing activities such as baking because large kitchens take up space that could be used more profitably for beds and conference facilities.
Kenyan supermarkets also stock many frozen goods – from vegetables to pizzas and pies – that could be supplied by local businesses. Carlyon estimates only about 5% of the products in the frozen food aisles of supermarkets are domestically made.
“This shouldn’t be happening. Kenya should be self-sufficient in many of these products and become a net exporter. The country has enviable weather. In Europe, you cannot grow vegetables for half the year because the ground is frozen. Here you can do it all year round, yet, we are still importing frozen vegetables. How can that be?” (Read more: Gaps in Kenya’s food industry)
* A version of this article was originally produced for the NTU-SBF Centre for African Studies at the Nanyang Business School in Singapore.